Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 has “cooled off” a bit this week following a ~7% run over the prior few weeks. The advance had pushed the S&P 500 to 16% above its 200 DMA, which has often preceded minor consolidations or short term pullbacks over the past 8 months. Positioning has gotten slightly more defensive beneath the surface, however this has come in conjunction with a normal moderation in interest rates and credit spreads remain low. In the short term, the market may need to work a little lower (not oversold yet). But the overall environment remains bullish- supportive Fed, robust GDP and EPS growth, stimulus, and a strong intermediate term technical backdrop (broad participation). This supports less downside in pullbacks, which we expect to be normal in nature when they occur. Market rotation is likely to continue, and also offer opportunity at the individual sector and stock level.
Q1 earnings season is underway, as 15% of S&P 500 companies have reported very strong Q1 results up to this point. 86% of these S&P 500 companies have beaten estimates by an aggregate 24% earnings surprise. For reference, the 15-year average for earnings surprises has been 4.7%; and the highest surprise on record (Q2 2020) was 23.5%. As a result, full Q1 earnings growth estimates are up to 28.3% (from 21.6% when earnings season began). Reports are set to ramp up meaningfully in the next two weeks- 36% of S&P 500 companies report next week and 27% the following week. We expect continued upside surprises, and forward estimates for 2021 and 2022 to maintain their higher revision trends. We remain above consensus for 2021 and 2022 S&P 500 earnings estimates- $190 and $220 respectively (vs consensus at $178 and $202).
While results have been above estimates at historically high rates over the past few quarters, price reactions have been below average- likely a function of large stock moves leading to more muted reactions. For example, Financials stocks outperformed significantly in Q1; and despite strong results and upside surprises so far, the average financials stock has moved -1.1% lower on results (albeit wide variances at stock level). On the flip side, health care stocks lagged in Q1, and it has been good to see positive price reactions (2.6%) to solid earnings. Many large technology companies report next week, and we are not only interested to hear results but also to see their price reactions. Performance was disappointing on strong results in Q4’20; but after consolidating relative strength for the past several months, the bar could be lower this time around. A strong quarter and price reactions could set the stage for improved Technology relative strength trends. Given Technology’s size, next week’s reports will also be very influential for the overall S&P 500 index.
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