A lot has happened since our last report. The Presidential election has still not been officially closed, there were two favorable COVID vaccine announcements, and the S&P 500 is back near all-time highs led by Value/Cyclicals.

And during the entire move higher, there have been many doubters with bearish views ranging from the world is ending, valuations are too high and there will never be a medical solution to COVID among other. In times like these, having a disciplined process that does not get whipsawed by the story of the day is critical. And our work has remained steady throughout the conflicting headline news since the March 23rd bottom – stay bullish.

We are still in the early innings of a profit recovery that is being accompanied by unprecedented monetary and fiscal stimulus. And I continue to recommend investors keep their focus on the bigger picture — 6, 12, and 18 months ahead.

Since late March, I have been advising investors employ a barbell approach by having a mix of Growth/FAANG and Value/Cyclicals at the expense of cash and defensive areas (Staples, Utilities, Real Estate, legacy Telecom). And following our broad-based ERM review, I still recommend this approach, but recommend investors slowly shift away from Growth and towards Value/Cyclicals. Our work also highlighted a shift from Large Caps to Small and Midcaps is underway which will continue and once COVID starts moving to the rearview mirror, will accelerate.

Over the last two months, I have been getting questions during our client calls about the elevated number of stocks that have N- (“less good”) readings in our stock selection model. In isolation, a slowing of our earnings revision metrics (ASM indicator) would normally spell trouble for the individual stocks that experienced rollovers as well as for the overall market.

But, context is important. Communications for the Fed indicate that a more restrictive liquidity environment will not happen for quite some time and we are still early in a new earnings cycle. Thus, the rise in the number of “less good” ratings will likely be transitory within an ongoing multi-year recovery and healthy uptrend, which will provide a strong tailwind for the equity market.

Bottom line: The broad-based earnings revisions data for the S&P 1500 is still quite robust and supportive of healthy equity markets. I continue to recommend a barbell mix of Growth/FAANG and Value/Cyclicals and recommend investors slowly shift away from Growth and towards Value/Cyclicals.

Disclosures (show)

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