Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
Equities have continued to march higher in recent weeks, extending the upside seen since early October to ~9% at the recent peak. There has been a definitive risk-on tone to the move higher with small caps breaking out to new highs, cyclical sectors outperforming the defensives, and areas like the transports and semiconductors leading the charge. While the underlying leadership bodes well for forward returns, we do see many stocks at overbought levels in the short term. The S&P 500 index reached 5% above its 50-day moving average during the rally, which is the widest deviation in over four months. So while the overall path of least resistance remains higher, we recommend that investors be pragmatic with new purchases at current levels- using rolling pullbacks in favored sectors and stocks as opportunity when they occur.
Earnings season is approaching an end, although a handful of retailers and tech companies report over the next couple of weeks. The message from companies, along with the economic data recently, is strong underlying demand trends are partially contributing to the supply-related shortfalls in recent months. This is effectively resulting in an elongation of the recovery in our view as sales are being delayed (rather than lost). With Covid cases declining and vaccination rates rising globally, we are hopeful that the supply-related pressures can subside over the coming months and ease inflationary pressures. Estimates for 2022 S&P 500 operating margins have declined slightly over the past month, but still show margin expansion over the next year (from what is already elevated levels).
Strong demand trends bode well for earnings momentum and upside surprises ahead. We remain above consensus for 2022 earnings with an estimate of $225 (vs. consensus $218). And if recent indications prove true that potential tax hikes are being watered down (i.e. 15% minimum corporate tax rate vs. broad-based tax increases), we see upside to our estimate toward $230-235. Moreover, stubbornly low interest rates and narrow credit spreads remain supportive of above average valuations.
In sum: We remain positive on the fundamental and technical backdrop but believe the market’s rate of ascent should begin to moderate at this stage of the recovery- with normal volatility occurring within an overall healthy trend over the next 12 months. As such, we would use market rotation and pullbacks as opportunities to accumulate favored stocks.
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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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