The U.S. equity markets have seen quite a bit of volatility since our last update in early October. The macro stories that investors have been focusing on were shifting quite a bit. And once the calendar flipped to November, the headlines intensified. At times like these, it is even more important to have a disciplined investment process.

Despite the back and forth of markets, I have remained medium term constructive on equities and have repeatedly stated that based on our indicators and read on the macro environment, the most important underpinnings for even higher highs in the equity market are still very much in place:

  • The Fed has clearly signaled that they will be on hold for an extended period and the favorable liquidity environment will not be interrupted any time soon.
  • The interest rate backdrop remains near record lows and supportive of equities.
  • The earnings revisions data for the broad equity market, which has a big impact in our investment process, is still robust. It shows that the rate of change in the depressed future profit expectations that were consensus in late-March and early-April, is still getting less bad for the broad universe of names within the S&P 500 and the S&P 1500, as shown by our proprietary earnings metric that we call Analyst Sentiment Measure (ASM).

The headwinds that we discussed in our previous sector publication appear to be becoming less relevant for now. Expectations for some economic stimulus legislation have risen, regardless of the eventual outcome of the election cycle. COVID-19 remains stubborn, but as I had expected, we got a favorable vaccine announcement before year end with the news from Pfizer on Monday. Clearly, this news does not formally end the ongoing pandemic as there are still many things that need to occur to get the vaccine formally approved, distributed, and then administered to the public at large. But importantly, for equities, performance will react well in advance of all those real-world issues.

Bottom line: Our research suggests that a powerful profit cycle is in the early innings and a favorable fiscal and monetary policy backdrop will combine to push equity prices higher. Any dips in the broad equity market that may occur in the coming days and weeks should be viewed as buying opportunities.

Our updated sector allocations are listed below. Relative to previous recommendations Materials was raised while Technology and Staples were lowered.

Most preferred sectors: Consumer Discretionary, Industrials, and Materials. With Comm Services and newly lowered Tech also being better than neutral.

Neutral: Healthcare

Least preferred sectors: Real Estate, Energy, and Staples with Financials and Utilities also below neutral.

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