Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
The global supply chain issues have weighed on earnings expectations in recent months, and individual companies’ abilities to weather this environment (pricing power, margin outlook) will be the prevalent theme of Q3 earnings season- which began this week. It is very early still, but 74% of S&P 500 companies are beating earnings estimates by an aggregate 11.4% so far. This is below the historically high levels of the past 5 quarters (as expected), but still above historical averages. If the current surprise rate holds throughout earnings season, Q3 S&P 500 earnings will finish at 3.3% sequential growth (vs the -7% consensus estimate).
The Q3 headwinds are a supply, not demand problem in our view; so the effect may ultimately be an elongation of the recovery process. The early takeaway from Q3 reporters supports this strong demand environment. The banks are giving a positive indication on loan demand, a key variable for the next stage of their recovery. The early read on software is positive, and concerns regarding an enterprise spend slowdown are likely overdone. For the airlines, fuel increases are impacting margins, but capacity and revenue trends are encouraging (particularly as the Delta variant impact fades). Also, the pullback in equities in recent weeks on supply concerns is contributing to some initial upside in price reactions with 69% of S&P 500 companies so far trading higher on their report (by a 1.2% average). All in all, early indications support our above consensus view to 2021 and 2022 earnings.
Moreover within this week’s NFIB Small Business survey, we note a couple of positive indications on the supply chain. The 3-month change in inventories grew 3% in September (positive territory and highest level since the pandemic began). At the same time, current inventory satisfaction slightly improved for the second month in a row. There is still a long way to go, and supply chain issues are likely to persist for multiple quarters. However, there are at least signs that we could be at or near an inflection point of “peak supply chain concerns.”
Technically, the S&P 500 has spent the better part of the past month below its 50-day moving average (4436). This remains a key level of resistance, and the index is retesting it again today. A rally above the 50 DMA will lessen the odds of needing to test the 200 DMA (4167) to the downside (and may suggest the worst is over). We are seeing a bullish divergence in the cumulative advance/decline line, which is a good sign that the market’s short-term slide may be coming to an end. If the S&P 500 fails to break (and hold) above its 50 DMA, the odds of testing the 200 DMA will increase. Nonetheless, the over-riding bull market conditions suggest a correction at worst, and a move to the 200 DMA would still be very normal- represents ~9% from highs which is in line with the average intra-year pullback historically for bull markets.
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Index Definitions
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
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