Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
The S&P 500 bounced from oversold conditions this week, but is so far failing at 200 DMA resistance today (4503). We will be monitoring price action at this level of resistance, along with ~4600 (February and March highs). Failure to break out or a quick roll-over (if resistance is initially overcome) will further embolden our opinion of range-bound trading for now. In terms of support, we will continue to watch 4370. A breakdown will increase the odds of additional weakness and potential retest of the lows. The overall pattern of indecision reflects the current period of uncertainty (regarding inflation, Fed tightening, slowing macro, and Russia/Ukraine war). Over the coming months, we will get additional data on all these issues. We remain of the opinion that the current market pullback will be more in duration vs. price from here (continued choppiness ahead). That said, we expect a positive enough outcome on the issues at hand to allow equities to print higher prices over the next 12 months (base case 4750 S&P 500 year-end target). As such, we would refrain from chasing equities in up-moves and use weakness near support as opportunity.
Despite the obvious headwinds of higher interest rates, commodity prices, and inflation, early indications suggest still strong demand in Q1 earnings season. The banks are reporting broadly higher loan growth, strong credit (low delinquency rates), and higher deposits with continued momentum through the quarter. The airlines are noting robust demand trends, along with expectations of profitability despite higher fuel costs (offset by higher prices). In health care, the recovery in med tech appears above expectations with an acceleration in procedures as Omicron concerns faded. Moreover, the rails are offering a positive early read on volume growth and pricing power. For Technology, it is too early with key companies beginning to announce next week (will be an important influence for the market); but the very early read is that tech spending remains strong. To be sure, the longer inflationary, commodity, and interest rate pressures persist, the greater the impact will be in our view. But for now, strong demand continues to offset these pressures overall.
Strong sales growth and stable margins (at elevated levels) continue to result in upside to earnings. Only 17% of S&P 500 companies have reported Q1 results, but 80% of them are beating by a healthy 7.4% so far (above 15- year averages). Also, forward estimates continue to trend higher. This solid earnings backdrop remains supportive of equity markets, and is important as the primary driver of market returns (with valuation elevated). The price reaction to results has been positive so far too with 2/3rds of the reporters trading higher by an overall average of 0.9%.
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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.
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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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