Earnings Revision Work Says Buy The Dip on Cyclicals

The S&P 500 is at all-time highs above 4000 and has rallied nearly 90% off its low of 2191 reached on 3/23/20.  It has certainly been a year filled with lots of challenges for everyone, both personal and professional. As the market looks poised to continue higher as the U.S. economy is beginning to reopen and begin its recovery, I find it quite interesting that there is such a plethora of pessimism and concern from both our clients and from many forecasters.   During the entire rally, there have been many different bearish concerns that the pessimists have kept agitating about.  In my view, equities have been following the age-old Wall Street expression of “Climbing the Wall of Worry”.  Over the past couple of weeks, the latest worry that appears to have surfaced is that investors and forecasters are selling their Value/Cyclicals/Recovery/Reflation positioning and shifting towards quality defensive growth.  I have heard our clients express these concerns and the arguments from competitors to support this view, and I have a response to this suggested shift — with a high level of conviction that is based on my proprietary research process, my work does NOT support these conclusions AT ALL.  With that being said, my work strongly suggests that any recent relative bounces in quality/defensive/growth should be SOLD and dips in Value/Cyclicals/Recovery/Reflation should be BOUGHT. 

My research continues to disagree with these negative outlooks and one major reason is that the earnings revisions backdrop for the S&P 1500 names remains quite robust and supportive of additional gains in the U.S. equity markets, which has been the case since the end of March 2020 when I first turned bullish post the COVID sell off.  It should be noted that not only are my proprietary earnings revisions metrics remaining healthy now, but I am expecting them to STRENGTHEN in the coming quarters.  Notably, this additional improvement continues to underpin my ongoing medium-term bullish view.  Despite the ongoing negative macro headlines that appear, as well as the other fears that recently surfaced, our view continues to be that one of the most important drivers for the continuation of the equity bull market is that a powerful corporate profit recovery is still in its infancy and because of the operating leverage improvements made by Corporate America during the past 12 months is being underappreciated.  Oh, and don’t forget the other “minor” contributor to our ongoing bullish view — the continuation of unprecedented monetary and fiscal stimulus.

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