MARKETS AND INVESTING
April 08, 2022
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
After rallying 11% from the lows in March, the S&P 500 has stalled over the past week at roughly the midpoint of this year’s trading range. Leadership beneath the surface provides some pause to the rally internally. The more defensive areas - such as Utilities, Consumer Staples, Real Estate, and Health Care - are showing relative strength; while the more risk-on areas - such as High Beta vs Low Volatility, equal-weight Consumer Discretionary, Transports, and Semis - have shown relative weakness lately. This is not an ideal leadership backdrop and supports our view that the market is likely to remain choppy, as investors digest the obvious headwinds of the Russia/ Ukraine war, high inflation, and a hawkish Fed. That said, economic growth and earnings trends remain healthy. And if inflation can moderate over the year, it may ease pressure on the Fed’s rate hike cycle later in the year (as the Committee seems intent on hiking relatively quickly over the coming months). We remain positive on equities over the next 6-12 months, and would use weakness as opportunity.
Q1 earnings season unofficially kicks off next Wednesday with several of the Financials. The pre-announcements and reports recently have been more muted than investors have become accustomed to (over the past 7 quarters) in aggregate. While the level of earnings beats has been moderating in recent quarters, “early Q1 reporters” have only been surprising by 2.1% (vs. 5.3% 15-year average). Additionally, only 71% of these “early reporters” have beaten on the bottom-line. While this is in line with the 15-year average (69%), it would be the lowest since Q1’20. We are interested to hear companies update their results and outlooks regarding input costs, consumer demand, and margins. Corporate guidance may lean conservative given the macro uncertainty. And while results may be closer to long-run averages, we do expect continued upside.
For those looking for more in-depth analysis and commentary on our market outlook, we recently published our 2022 1st Quarter Equity Market Update- link here.
We also published a report highlighting Yield Curve Inversions and our thoughts on the implications- link here.
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