Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 has remained very resilient in spite of drastically bad economic data, as massive stimulus (fiscal and monetary) is outweighing the dramatic economic impact and uncertainty for now. There have been some economic “green shoots” starting to emerge, albeit from exceptionally low levels. Additionally, companies have discussed some April stabilization/improvement in their quarterly commentary but continue to stress uncertainty in the outlook. Data on the potential trajectory of the economic recovery will be paramount to investors, as they assess the path forward for equities.
At a 20.3x forward P/E multiple, we believe the market is not fully appreciating the economic challenges still out there. For an economy that is not going to be operating at full capacity, odds are high that equities will experience a downdraft at some point. Technically, the S&P 500 is firmly in a pause phase- grinding roughly sideways over the past few weeks at a level that it should (61.8% retracement of the 34% selloff). We therefore would be patient and selective with purchases at current levels. 2955 remains the first area of technical resistance to watch. Above 2955 is a band of resistance in the 3000-3025 range followed by more resistance at 3136. On the flip side, we view technical support at 2721, 2538, and 2455 but also keep an eye on 2663 (38% retracement of the rally) and 2573 (50% retracement of the rally).
Beneath the surface, Q1 earnings season has confirmed the bifurcation of stocks- with wide disparity in performance and fundamentals between clear “haves” and “have nots” in the current environment. For example, the tech-oriented and non-cyclical sectors are set to grow earnings by 3.2% on average in Q1. Q2 earnings are expected to see the biggest COVID-19 impact, but these stocks are still only expecting a 12% earnings contraction on average in a horrendous economic environment- not too bad. Contrarily, the cyclical sectors are set to experience an earnings contraction of -34.7% on average in Q1 and -81.6% in Q2. This fundamental impact is reflected in performance with areas like technology and health care breaking out to new relative highs, while areas like financials and industrials break to new relative lows. This dynamic is also buoying the overall index, as the technology, communication services, and health care sectors alone make up over half of the S&P 500. These are actually our three favored sectors, leaving plenty of opportunity to accumulate individual names exhibiting relatively strong fundamental and technical momentum.
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