Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 achieved its 47th new record high closing price of 2021 today as the grind higher in equities continues. Despite COVID remaining the big risk to the market in the near-term, better-than-expected macro and more stimulus in the form of an infrastructure bill have spurred a rally in the 10-year yield and sector rotation beneath the surface with re-opening areas such as Financials and Industrials benefiting while Technology has given back some relative performance. Overall, this pro-cyclical/reopening move higher has been positive for the Value index, which saw a price break-out. Divergences remain and the market continues to be relatively narrow, but the current mood of the market remains positive and the S&P 500 has seen some recent improvement in breadth with the percentage of stocks trading above its 50-DMA now at 67% (while less than 40% on the NASDAQ). We would not get complacent, the market is not perfect and the narrow market breadth leaves the market vulnerable to market pullbacks/sector rotations mixed with a seasonally soft period of the year and the S&P 500 currently overbought. During periods of consolidation (at either the market level or sector level), we would be opportunistic in accumulating.
The next level of technical resistance to watch is 4480. For support, monitor the 50 DMA (~4330), followed by 4233, 4165 and 4060 (horizontal support levels at recent lows).
Fundamentals remain strong. 2Q’21 earnings season is largely complete at this point, and it is another stellar quarter with the 5th consecutive quarter of strong earnings upside. The average EPS surprise is 16.8% with 86% of S&P 500 companies seeing EPS beats pushing the consensus growth for 2Q to 89.8% YoY. Looking forward, revision trends for 3Q and 4Q remain favorable, however, consensus expectations are still pointing to earnings in 3Q to be below 2Q levels and relatively in-line with 1Q actual results. Historically, the median growth from 2Q to 3Q (since 2002) has been about +1.2%. It remains our belief that earnings can continue to surprise to the upside with our base case assumption of $200 for 2021 (and our upside case of $210) vs. current consensus of $198.67.
While the USA remains our favorite area globally, Developed ex-US is beginning to firm up, specifically Europe. Europe recently has a price breakout and relative performance vs. the world has been improving with higher lows. While we are still waiting for a relative strength breakout for Europe following the recent price breakout, the higher lows in relative performance and improving GDP outlook are encouraging.
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