Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Q2 earnings results are blowing out estimates once again- continuing the trend of the past several quarters. 87% of S&P 500 companies are beating estimates by an aggregate 19.1%- well above historical averages (and in line with the past 4 quarter average). 60% of the S&P 500’s market cap has reported up to this point, and full quarter estimates have already been revised 10.4% higher, reflecting a notable 82% growth y/y. Margins are a big topic of conversation on company calls; and while rising input costs are being mentioned as continued concerns going forward, companies overall have been able to maintain/expand margins due to very strong demand trends up to this point. Looking forward, margin estimates continue to trend higher, as do earnings estimates for every quarter of 2021 and 2022. We remain positive overall on the fundamental recovery and expect upside to continue. In addition, low interest rates and enormous stimulus are supporting elevated valuation multiples as this fundamental momentum takes place- providing upside to equities.
Technically, we have been monitoring divergences in the S&P 500’s ascent over the past couple of months, noting participation has been extremely narrow. For example, the index has been making new highs while the percentage of stocks above their 50-day moving averages has contracted. Additionally, the S&P 500 has gained 5.3% since the end of May, but 60% of this move can be attributed to just the largest 5 stocks- AAPL, MSFT, AMZN, GOOGL, FB. Those stocks are up 14% on average while the rest of the index has been relatively flat. We have not been overly concerned based on the market’s proclivity for rotation in the current environment, along with still solid intermediate term trends. Importantly, we see the potential for sector rotation to swing back in favor of the “recovery-oriented areas,” and note a breakout to new highs by the S&P 500 equal-weighted index on relative strength today. One day does not make a trend, and we would like to see this build on itself over the coming days/ weeks. But given our recommendation for a balanced but pro-cyclical tilt to sector allocations, we view the recent pullbacks in some of the more economically-sensitive areas (i.e. small caps, energy, financials) as opportunities.
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