March 12, 2021
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The US economic backdrop continues to improve with nonfarm payrolls pointing to recovery (albeit still below its pre-pandemic level) along with subdued inflation (for now) as core CPI actually saw a deceleration in YoY trends in the month of February. Combined with the $1.9T fiscal stimulus package approved by Congress, dovish commentary from the Fed, and a slight easing in the rate of ascent in the 10-year yield, the S&P 500 attempts to resume its upward price trend as it made a new 52-week high intraday today.
Despite breaking below the 50-day moving average last week, the S&P 500 was able to hold above the January low of 3694 before this week's rebound. We would like to see the S&P 500 hold above the prior 52-week high of 3950 followed by the next area of resistance likely at 4274 (which is the next Fibonacci projection).
From a fundamental basis, we recently updated our base case EPS estimates to $190 and $220, respectively, for 2021 and 2022, and increased our S&P 500 price target to 4180 by year-end 2021 and 4400 by year-end 2022 (please reference our latest note for more details). Currently, NTM P/E is ~22x. However, if our price objective of 4180 is achieved by year-end, the S&P 500 would be trading at ~19x our 2022 EPS estimate, which is in-line with pre-pandemic levels. We continue to see 2021 as a transitional year as valuations normalize as EPS and GDP grow above trend. As we go into 2022, we would expect some continued normalization in valuations (but to a much lesser degree) with continued strength in EPS and GDP growth driven by economic reopening and the unprecedented level of stimulus. For the most part, the consumer is in good shape with savings rate north of 20% (before the latest round of stimulus), which should provide plenty of pent-up demand for the coming years.
1Q'21 earnings season is only about a month away (with the quarter closing in the next few weeks). With 4Q earnings season finishing above consensus estimates at a historically high rate for the third consecutive quarter, it would be logical to believe there may be some pull forward from quarters in 2021, however, thus far, we are not seeing this take place with 1Q'21 earnings expected to increase 19.2% YoY to $39.09. Remember last year during the first quarter, there were about 2 months before the COVID-19 pandemic caused widespread shutdowns. From a sector perspective, Financials and Consumer Discretionary are expected to see the strongest YoY earnings growth (with both expected to grow greater than 50%) while Energy, Industrials, and Real Estate are expected to see declined YoY from last year's 1Q'20.
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