Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 continues to glide higher, but participation within the advance lately has been very top-heavy. For example, the largest 5 S&P 500 stocks- AAPL, MSFT, AMZN, GOOGL, FB (which collectively make up 23% of the S&P 500’s market cap)- have seen a relative strength resurgence over the past six weeks as Delta variant concerns have risen and the US 10yr Treasury yield has softened. In fact, the S&P 500 is up 4% since June 3rd, but ~80% of that move can be attributed to just those largest 5 stocks. They are up 12.5% on average over that timeframe vs the rest of the S&P 500 down by an average of -0.7%. The smallest 50 S&P 500 stocks are down -7% on average. Narrowing breadth is a sign of internal weakness and can sometimes precede pullback periods. We are mindful of this, but not overly concerned given the strong intermediate term technical backdrop along with the market’s proclivity for sector rotation lately. We remain positive on equities broadly, but would look for opportunity within favored stocks as they pull back toward technical support levels. Tactically, these fall in more of the "reopen" areas at the moment, such as small caps, financials, energy, industrials, and select consumer discretionary.
Q2 earnings season is off and running with 6% of the S&P 500 having reported thus far. 90% of those companies beat estimates by an aggregate surprise of 28%. Announcements have been bank-heavy so far with 44% of the financials sector actually reporting in this week alone. The sector has already seen its Q2 estimate move 14.5% higher on a 33% earnings surprise, and one of our major takeaways from the banks is strong consumer spending and credit trends (which should have broad implications for corporate fundamentals). S&P 500 estimates for the full quarter are on the rise as a result- up by 2.7% in just the first two days of earnings season. Additionally, despite the strong upside in results so far, price reactions have been muted/mixed with ~60% of S&P 500 stocks trading lower on results for an average 1-day price reaction of -0.3%. This has been the going trend of the past several quarters in the recovery- strong upside surprises but below average price reactions- particularly so for technology. With technology showing strong relative performance lately in the run-up to earnings, we are interested to see how the sector responds to results in the coming weeks (also important for the market as a whole given tech’s size). Overall, the strong start to Q2 earnings season supports our above-consensus view on earnings. Our base case estimate on S&P 500 earnings for 2021 and 2022 are $200 and $230 respectively (above consensus of $190 and $211).
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