We are constantly monitoring a variety of quantitative and proprietary tools to get the best pulse we can on markets. One of our most robust tools, our Earnings Revision Model, is suggesting that investors who are focused on time horizons beyond six months should remain bullish.
While there may be some choppiness in the 1Q2021-2Q2021, we expect that it will be in the normal range of healthy pullbacks that occur in the midst of ongoing bull market; a decline of 5%-7%. Currently, we believe this pullback will be too short and too shallow to measurably effect the mainly bullish catalysts that should push equity prices significantly higher by year-end. Upcoming weakness should thus be used to ‘buy the dip’ on strong names.
One thing we also have been detecting from our work is that revisions are becoming more favorable down the cap scale, meaning that we are seeing signs that suggest tilting exposure toward Small/Mid Cap names from Large Cap.
We are obviously continuing our recommendation to be overweight Value/Cyclicals. However, our proprietary research on the Secular Growth/FAANG names continues to be largely constructive. While some in the financial media have compared the run-up in these names to the 2000 Internet Bubble, we do not find evidence of this in our work. Secular Growth/FAANG should continue to be a prominent element of the conservative side of your barbell.
The earnings revisions for Financials started improving for SMID regional banks in October and has broadened up the cap scale. We have also continued to see marginal improvement in Energy. Our work is still flagging the Semi-cap equip and Semi chips sub industries. The Auto/Related, travel and leisure, restaurants and retailers still stand out to us within the Consumer Discretionary sector. These Epicenter sub-sectors should all benefit substantially as the economic recovery continues to pick up steam as a result of mass-inoculations and pent-up demand.
One thing we are continuing to look out for as 2021 continues is when we will make a major strategy shift from beta-driven names (correlated to healthcare outcomes) and more alpha-centric stock-picking based on idiosyncratic company performance.
Our update sector recommendations are as follows:
Most preferred sectors: Consumer Discretionary, Industrials, and Materials. With Comm Services and Tech also being better than neutral.
Neutral sectors: Financials
Least preferred sectors: Utilities, Staples, and Real Estate with Health Care and Energy also below neutral.
Bottom line: Any dips in the broad equity market that may occur in the coming weeks based on worsening COVID cases and short-term weak economic data should be viewed as buying opportunities. I continue to recommend a barbell mix of Growth/FAANG and Value/Cyclicals and encourage investors to slowly shift away from Growth and towards Value/Cyclicals.