Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
The S&P 500 was able to break out to new highs on a strong start to Q3 earnings season that eased some investor concerns surrounding the Delta variant’s impact on economic activity, global supply chains, and inflationary pressures during the quarter. Participation in the rally was fairly supportive, as the “average stock” broke out to new highs with the index- led by some of the more economically-sensitive areas (i.e. Energy, Financials, Transports). While the market’s advance was able to push above technical resistance levels (supporting the overall bullish tone to trends), a 5% 10-day move can often be followed by a sideways to slightly downward consolidation in the short-term (days to weeks). We would not be surprised for this to occur, as the market’s pace of ascent and volatility should begin to normalize at this stage of the bull market. And within digestion phases, there can be rolling pullbacks beneath the surface- which we would use opportunistically for favored stocks and sectors.
We are in the heart of Q3 earnings season at the moment with the bulk of companies reporting this week and next. About half of the S&P 500’s market cap has reported up to this point with 81% of companies beating estimates by a healthy 12%. This week’s takeaways include strong fundamental momentum from Technology, which is continuing to benefit from accelerated technological uses and needs in the digital economy. Key consumer and industrial companies are noting rising costs, but also very elevated demand (margins holding up better than expected). We are also encouraged by indications of improving consumer spending trends throughout the quarter, as Covid cases declined. A noteworthy highlight from a major semiconductor company was that lead times have slowed. We will have to monitor other semiconductor comments (to make sure not a one-off), but this would be a positive indication for inventory pressures as semiconductors are used in a wide variety of products.
Overall company commentary supports our positive stance on the economic recovery ahead, following the Delta variant peak. Supply issues will take a while to normalize, and we will be dealing with constraints and inflationary pressures well into next year. However, it is our inclination that we could be at or near “peak inflation concerns.” This would ease margin and Fed policy concerns, while supporting S&P 500 valuations and earnings. Additionally, the Build Back Better framework released today is watered-down from President Biden’s earlier proposal and would be much less onerous on corporate fundamentals. Negotiations are very fluid, but the current framework would provide upside to our 2022 earnings estimate of $225 (which included an increase in the corporate tax rate to 25%) toward $235.
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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.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
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