Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
After gaining nearly 19% on an intraday basis (from the low in June), the S&P 500 found resistance at the 200-DMA and remains overbought. However, the technical picture has improved drastically with two key signals we have been waiting on that were triggered in the last week (% of members above the 50-DMA getting above 90% and getting back above the 50% Fibonacci retracement level). Overall, we do not expect unbridled upside, but these signals likely increase the odds that pullbacks are buyable, as these signals have been consistent with markets moving back to highs instead of plummeting to new lows.
One area that we will continue to monitor will be performance at the sector level. Thus far, Utilities are the only area to get back above prior highs. This defensive posturing is not typically consistent with leadership in the early innings of a renewed bull market. However, it is likely signaling that more time is needed for the more Growth/cyclical sectors to improve before a move back to highs for the S&P 500 is possible.
With earnings season wrapping up, 2Q earnings surprised to the upside by 3.2%, with 74% of companies beating earnings expectations. This compares negatively to the 5-year average upside surprise of 8.8% for the S&P 500 with 77% of companies beating estimate. While 2Q’22 earnings have moved higher throughout earnings season, there was likely some pull forward as 3Q’22 earnings have declined and now are expected to decelerate compared to the 2Q. Earnings estimates continue their downward trend with consensus estimates now expected to be $223.29 (8.3% YoY) in 2022, which is approaching our base case estimate of $220. For 2023, consensus estimates are for $241.79, which we believe will need to be revised lower as the economic environment continues to soften. Our base case estimate for 2023 is $215, which assumes a mild recessionary environment.
In the short-term, the market is extended to the upside, which could result in some back filling over the coming days/weeks. However, given the improving technical picture, we believe investors can look to add on weakness. There remains significant overhead resistance at the 200-DMA (currently at 4324) and downtrend line (currently at 4340). However, if a pullback does transpire, we would look for support at 4164-4200, which corresponds closely with the 21-DMA.
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