Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
S&P 500 companies are wrapping up what has been a very strong Q3 earnings season. The key takeaways, echoed by major retailers this week, are persistent supply and labor challenges but not outweighed by the very strong demand backdrop- effectively elongating the recovery with delayed sales (rather than lost). S&P 500 sales were able to grow 3.9% q/q and 17.7% y/y on solid margins, resulting in 1.5% earnings growth q/q (well above the -7% earnings contraction expected) and 40% y/y.
Looking ahead, operating margin estimates have stabilized at very strong levels, after initially showing a slight downtick, supporting fundamental momentum ahead. Strong new orders and record high backlogs, along with our expectation of easing supply chain pressures over the next 6-12 months, should also support upside to consensus earnings estimates in our view. We maintain our above consensus view to earnings, and our 2022 estimate of $225 could see upside if recent indications of watered-down tax increases prove true (i.e. 15% minimum corporate tax rate vs. broad-based increases).
Valuation remains elevated but is acceptable as long as rates stay low and inflation moderates back to a ~2-3% level. The biggest risk over the next year (as we see it now) is if inflation proves sticky and investor sentiment shifts to a stance of belief that the Fed is behind the curve. We believe multiples will normalize over time, but not outweigh the earnings recovery- providing upside to equities.
Technically, following a roughly 9.5% run higher from early October to early November (through earnings season), the S&P 500 has hovered near highs over the past couple of weeks. This is very healthy technically, as the index attempts to digest overbought conditions. Short-term stochastics remain near overbought territory and sentiment continues to show investor complacency. Additionally, MACD is crossing over which may indicate the need for a continued consolidation of the index in the short-term (days to weeks). That said, overall technical trends remain strong and seasonal patterns into year-end are supportive. We maintain our balanced, but pro- cyclical stance (between technology-oriented and more recovery-oriented areas) to portfolio positioning and recommend using consolidation in favored stocks as opportunity.
We wish you and your families a very Happy Thanksgiving! There will be no Weekly Market Guide next week.
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