We did a deep dive into our sector (GICS L-1) work and have updated our thoughts. We are reiterating our mainly Growth above Neutral view (HC, Staples, Utilities, Energy, and Tech) and our below Neutral Cyclicals (CD, Materials, Industrials, Financials and Comm Services) weighting. Please note that Industrials and Materials were downgraded again from Tilt Below to Full Below.
Our work and key indicators remain unfavorable and now that “Dovish Pivot” by the Fed has been definitively taken off the board for now equity market downside risk is considerable. The ASM indicator for the S&P 500 is still falling and looks to need more time to reach its maximum pessimistic reading for this cycle. Historically, this does not bode well for the equity market and efforts of looking for a bottom have proven premature. The process of fighting inflation, slowing economic growth, lowering forward profits expectations, and rerating valuation multiples lower takes time and usually lower equity prices. Yes, at some point, key indicators and pricing metrics will all become extreme at the same time, which will signal that bad news will be overly discounted, but my analysis suggests that an important confluence of events is still on the horizon.
Therefore, we continue to suggest investors sell rallies, if they should occur as the reward/risk is not favorable.
Macro/Bigger Picture Conclusions
- The rally that began at the June low is now. Hence, the resumption of the move lower by the U.S equity market is back in motion. My research is still signaling that the 3600-3500 is the next target area for investors to keep an eye on, and the oft mentioned even lower scenario is still on the board.
- The combination of a now fully committed inflation fighting Fed and forward earnings estimates that most certainly need to be lowered even further from their current levels is a powerful mix that investors should not underestimate. Equity markets remain in one of the most challenging backdrops of the last several decades, and when using my key metrics an important conclusion is that investors certainly have their work cut out for them.
- Based on this, I am still advising being careful, cautious, and patient while being full alert for potential opportunities that may present themselves during my expected challenging period.
- For relative investors, my work has and remains quite clear by suggesting a portfolio construction that consists of an above benchmark mix of Growth, both defensive and offensive, relative to Cyclicality.
- Most preferred sectors are HC, Staples, Utes, Energy, and Tech.
- Least preferred sectors include CD, Materials, Industrials, Financials, and Comm Services.
Please see PDF for full report.