Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 was able to bounce back above its 50 day moving average and reach within 1% of new highs, following the US/China trade agreement last week. On the trade front, attention moves toward the scheduled meeting between Presidents Trump and Xi in mid-November at the APEC Summit in Peru, where expectations are for a potential signing of this agreement. The S&P 500 P/E has been able to expand on the near term trade agreement to 18.1x-its highest level since exactly one year ago. However, this is just in line with the 5 year average of 18.1x. In our base case scenario, we continue to view 18.5x as a fair market multiple over the next 12 months. Trade, along with sluggish economic and earnings growth, are headwinds to multiple expansion; while the accommodative Fed, low interest rates, and low inflation are tailwinds.
Earnings are the main market influence now for the coming weeks. In general, Q3 earnings season has begun in positive fashion, led by the Health Care, Industrials, and Financials sectors (three of the more out of favor areas this year). The average S&P 500 stock has gained 0.6% on results so far, while these sectors above have seen average price gains of 3.2%, 1.81%, and 1.5% respectively. For the S&P 500 as a whole, 13% of companies have reported Q3 results. 83% have beaten on the bottom line (vs 71% over the past 3 years) for an earnings surprise of 3.95% (vs 5.5% over the past 3 years). Additionally, 60% have beaten on the top line for a sales surprise of 1.04%.
Technical: The market trend in the second half of this year has been full of indecision, with trade obviously being a significant influence. As such, the S&P 500 has been range bound for several months with the index currently near the top of that price range. While we expect a generally positive market tone for the time being, we suggest patient accumulation with the S&P 500 approaching overbought conditions and with key earnings reports in the next few weeks.
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