Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The bullish environment continues to prevail for equities, driven by an extremely rapid economic and earnings recovery, along with a Fed on hold. March retail sales rose by an enormous 9.8% m/m, boosted by $1.9T stimulus passed during the month, along with increasingly relaxed stay-at-home measures (i.e. spending in bars and restaurants is now within 5% of pre-pandemic levels). Retail sales are now up at a 34.7% annualized rate in Q1’21 vs Q4’20. And with the vaccine rollout continuing to ramp up (3M Americans being vaccinated/day), we continue to have a positive bias to the economic recovery as the reopening transpires, boosted by unprecedented levels of stimulus and a still accommodative Fed.
The strong economic data in Q1 is being reflected in a strong start to Q1 earnings season so far. Full Q1 S&P 500 earnings growth estimates have already begun to gap higher- up to 24.7% from 21.6% in the first two days. Although it is still very early in earnings season, companies already reported have beaten estimates by 38% in aggregate- driven by a 63% earnings surprise from the Financials thus far (on large reserve releases). For the S&P 500, these early reports suggest significant upside to Q1 estimates, likely to follow the trend of the past three quarters- that being historically high surprise rates of 23.5%, 19%, and 14.8% (vs the 15 year average of 4.7%). Additionally, forward estimates for all quarters of 2021 and 2022 continue to trend higher, supportive of our above consensus earnings estimates to 2021 and 2022 of $190 and $220 respectively.
A moderation in the rise of interest rates, along with strong economic data and continued improvement in corporate credit spreads, have been supportive of elevated valuation multiples lately (28x S&P 500 P/E). We continue to believe that valuation is set to normalize this year as earnings recover, but can remain well above historical averages given enormous stimulus and still low interest rates. Moreover, we believe robust earnings growth will outweigh valuation normalization as the year transpires, resulting in upside to equities.
Technically, the S&P 500 has continued to climb following its break out to new highs on April 1st (now 5% higher in April). Leadership has come from the technology-oriented and growth stocks during the advance, in conjunction with a consolidation of interest rates. While rotation continues to take place at the sector and stock level beneath the surface, overall participation is extremely broad with over 95% of S&P 500 stocks above their 200 DMA and over 91% above their 50 DMA. The underlying strength of the technical backdrop continues to be supportive of market trends. We expect pullbacks to be normal in nature and recommend using them opportunistically.
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