Weekly Market Guide
The S&P 500 remains at all-time highs, as it continues to digest short-term overbought conditions along with very strong Q1 earnings results. The macro backdrop continues to improve with Q1 GDP growing 6.4% q/q (second strongest quarter in over 15 years), and the underlying data was even stronger (i.e. domestic final sales +10.6%). US real GDP is now just 0.9% from its pre-pandemic level, set to surpass its pre-recessionary level in just six quarters (a full two years quicker than the credit crisis recovery). And April PMI surveys pushed to their highest readings on record. We maintain our positive stance on the economic recovery, supported by a strong vaccine rollout (roughly 40% of adults fully vaccinated), pent-up demand for a reopening (21% savings rate vs 7.5% 15-year average), and still very low inventory levels, along with fiscal stimulus and a still accommodative Fed.
This strong economic growth is filtering into exceptional Q1 earnings. 40% of S&P 500 companies have reported so far with 86% of these beating on the bottom line by an aggregate 23.9%- which would be the highest earnings surprise on record if sustained. Q1 S&P 500 earnings growth estimates are now up to 35.5% (from 21.6% when earnings season began). Price reactions, however, remain muted on average and mixed across companies- suggesting much was priced in after the strong market gains into the quarter. Overall, full year 2021 and 2022 estimates (and all quarters within) continue to get revised higher, and we believe upside remains. We remain above consensus estimates for both years- $190 EPS for 2021 (vs 179.50 consensus) and $220 for 2022 (vs $203). Valuations remain elevated, but are supported by low interest rates and corporate credit spreads. We continue to believe that robust earnings growth will outweigh valuation normalization in the recovery ahead, providing upside to equities. We continue to expect normal pullbacks and market rotation to occur, but the structural backdrop remains solid technically. As such, look for opportunity at the sector and stock level.
Interest rates have been a large influence on market rotation and, after consolidating to its 50 DMA in recent weeks, the US 10 year Treasury yield appears set to move higher. Supporting this view is the relative performance of copper vs gold- a gauge of economic momentum and risk appetite- that has been correlated to bond yields and broke to new highs this week. If bond yields are set to show some upside, this is likely to be a boost to Financials relative performance (which has been correlated to bond yields). We recommend overweight exposure to Financials and would look to accumulate. Accordingly, we also recommend accumulating Value, which had experienced a consolidation in relative strength with the moderation in interest rates- both of which could be set to resume higher.
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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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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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