Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 remains resilient, trading at new highs despite ongoing concerns over the coronavirus (COVID-19). One of the reasons for the recent strength has been a declining trend of new cases since 2/4. However, a change to the new diagnosis standard today saw the daily number of new cases jump by 15,208 (vs 2,066 yesterday) and new deaths increase by 254 (vs 97 yesterday). The ongoing uncertainty surrounding the virus is likely to remain a headwind, although we remain of the view that the market impact will be transitory and that pullbacks should be used as buying opportunities.
Contributing to our positive bias to equities is the fundamental backdrop, as Q4 earnings season has been very supportive. 76% of S&P 500 companies have beaten on earnings (74% have reported thus far), taking the index's expected earnings growth for the full quarter up to 1.6% (from -1.6% when earnings season began). As was the case for Q1-Q3, the average S&P 500 company is reporting 5.6% growth, much stronger than the headline. Looking forward, 2020 estimates have held up much better than 2019 so far and reflect a re-acceleration in earnings growth of 8.1%.
The highlight this earnings season has been the strength of the Technology stocks- putting up some of the best growth with the strongest forward estimate revisions of all sectors. This was important for the market's largest sector as valuation had gotten elevated into the results. While Tech has traded well (up 10.8% year-to-date), the average S&P 500 stock is up only 2.5% YTD. This has created a fairly narrow, top-heavy market. For example, the largest 4 stocks of the S&P 500 (AAPL, MSFT, AMZN, GOOG) have been responsible for roughly 2.12% of the S&P 500's 4.6% return. Another way to look at this would be ~46% of the S&P 500's return so far this year can be attributed to just 4 stocks! We would like to see participation broaden out in market strength, signaling a more supportive technical backdrop. This is not something to react strongly toward, but the narrowing divergence is something to keep in mind as it could signal a needed pause or consolidation phase for the overall index.
There is also a lot to like technically, and the recent break out to new highs sustains the market's momentum (path of least resistance is higher). The semiconductors, often viewed as a gauge of broader economic and market momentum, have outsized exposure to China and are also breaking out to new highs. Previous highs are now the first level of support for the S&P 500 (~3337), followed by the 50 DMA of 3249 (which recently held in the brief coronavirus-induced pullback of late January) and horizontal support at 3212 (-5% from current levels).
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