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Alpha City

Alpha City

Is anyone else tired like me after this week’s trading action in the S&P 500?  The market started the week quite strong and rallied up about 2.7% to nicely reverse last’s week down performance.  However, during the middle of the week, fears of rising interest rates began to spill over into equities and caused some down action that pulled the index down nearly 5%, which was disproportionately impacted by even larger declines by in many growthier names within Consumer Discretionary and Tech.  Investors then turned their attention Fed Chairman Powell on Wednesday and his words during an online event did not calm the bond market and further pressured stocks.  After flirting with a bigger selloff, the S&P 500 found energy on Friday from both the positive release of the monthly employment data release and some dovish Fed comments to end the week up for day and slight gain for the week.  Lots of running to make so little progress.  At the beginning of the week, we released the results of our monthly deep dive into our sector (GICS-L-1) work and have updated our FSI Sector Allocation recommendations (please see the sector section of our website).  We wanted to end the week by reiterating the main conclusions that our allocation methodology has been suggesting: 1.      Traditional defensive area (HC, Staples, Utes and RE) will likely continue their underperformance of the S&P 500 and are thus Below Benchmark sectors. 2.      Continue shifting toward Epicenter/Value/Cyclicals/Financials and away from Growth/FAANG 3.      Do not completely abandon Growth/FAANG names, and this week’s severe price corrections with CD/Tech may be creating an opportunity to selectively add some exposure.  Getting more granular, our analysis has resulted in us upgrading the Financials and Energy sectors, which were the third upgrades for both sectors over the past five months. Despite the recent market volatility our tactical indicators are favorable, which has us aligned with our ongoing medium-term bullish stance. Also, we have lowered Consumer Discretionary from Above Benchmark to Tilt Above, however, our work still shows that there are still many favorable individual stocks within the sector.  It should be noted that the sector is being overly impacted by nearly 50% weighing of AMZN, TSLA, and HD. Based on our indicators and read on the macro environment the most important underpinnings for the overall equity market and our continued expectations for even higher highs are still in place. Although there has been some anxiety coming from the bond market, it is our view that the Fed is still likely to hold on for an extended period and the recent upward move in rates was overdone. It is our expectation that a favorable liquidity environment will endure for the foreseeable future. Notwithstanding rumblings from the ‘Bond Vigilantes’, the rate backdrop remains near record lows and supportive of further equity gains. The real rate on the 10-yr when accounting for inflation is near-zero. We continue to reiterate that the earnings revision data for the broad equity market, which is a major part of our investment process (and has proved its worth in adding value over 20 years), is still quite healthy. Our expectations are that this remains the case as analysts and investors start shifting their focus to economic recovery and a powerful corporate profit cycle. Thus, we encourage investors to remain focused on the long-term the; 6 month, 12 month and 18 month time horizon for which readings are still overwhelmingly positive. When looking for risks that are out there and what we watch closely, the first and main potential concern is sudden and sharp increases in interest rates and inflation expectations may remain problematic for the short-term and may return from time to time throughout the year. There are other issues that could obviously cause increased volatility like a fourth wave of COVID-19 or increasing ubiquity of the new viral strains. The bottom line this week is that the current bout of volatility is likely creating an opportunity for investors to raise exposure in areas and specific stocks that may have begun to run away from us and to move further into the most favorable ideas that our research is flagging.  Most preferred sectors: Financials, Industrials, and Materials with Information Technology, Energy and Consumer Discretionary better than neutral Neutral sectors: Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate

Despite Increased Volatility, Key Model Says Stay Bullish

One of my most important analytical tools is my quantitative stock selection model, which I call ERM and will be the basis for the upcoming release of FSI’s new single stock Dunks product. My team and I update my model every week and are always looking for new opportunities for clients. Importantly, we do a deep dive into the names in the S&P 1500 Super Composite and I wanted to share my main conclusions in this week’s comment. Broad Summary Comments: The first key takeaway is the same one that we have been discussing for the last 6-9+ months — the earnings revisions backdrop for the S&P 1500 names remains robust and supportive of additional gains in the U.S. equity markets, which has been in place since the end of March 2020. Hence, I am retaining my longstanding constructive medium-term view for equities, which was first communicated on 3/20/20. There remains a plethora of bears that that are still focused on overvaluation, the size of the move off the March low, the ongoing COVID cases, and now fears of rising inflation and interest rates. These are all fair points to consider. Yet, my focus continues to be on the powerful bullish combination of broad-based positive earnings revisions as measured by my proprietary ASM indicator, still historically low interest rates, record monetary and fiscal stimulus that should continue to overpower the negative headwinds. New Observations from the broad-based S&P 1500 ERM review When looking at the overall Index on cap size basis, the slow shift of favorable revisions down the cap scale that we first saw in our work back in 3Q20 is still occurring. Thus, we have been more favorable on SMid cap names relative to Large Caps for the first time in many years. There are three main areas of favorable earnings revision readings — 1) Secular Growth/FAANG; 2) Value/Cyclicals that are higher quality and generally more growthy (e.g., Capital Goods, Machinery, Semi related); and 3) Value/Cyclicals/Financials that includes the front line recovery/Epicenter universe and deep commodity/industrial/consumer/interest rate cyclicals. Sector level observations that I found interesting: Energy — even though my work is still not broadly favorable, there continues to be slow marginal improvement, which we first highlighted back in November. Please note that we have upgraded the sector twice over the last four months. Materials — there are still a healthy number of interesting names in Chemicals, Industrial Metals (Copper/Steel/Aluminum), and Packaging. Industrials — Defense-related names continue to look weak and the more interesting areas are in Machinery, Cap Goods, Rails, and Airlines, which has been the case for several months. Consumer Discretionary — the work continues to flag compelling names in Auto/Related, the entire travel/vacation space (Casinos/Hotels/Travel companies), Restaurants, and many Retailers. Technology — my indicators are still highlighting the Semi-cap equip and Chips names despite their explosive price moves my work portends that this profit cycle is still in the early innings, which would strongly imply additional stock price outperformance. Furthermore, most cyclical names within the sector look quite interesting with Hardware, Electronic Equip & Instruments, Electronic Components, Electronic Manufacturing Svcs, and Tech Distributors. Financials —the SMID regional banks started looking better back in late October/early November and this trend has broadened up the cap scale as time has passed, which has led us to upgrade the sector twice in the last four months. Defensive areas — my work has been flagging since April 2020 that the least number of favorable names in Staples, Utilities, legacy Telecom, and Real Estate. If one is looking for exposure within these sectors, there are some single stock ideas that do look like interesting opportunities, but it does take some digging. Most preferred sectors: Consumer Discretionary, Industrials, and Materials with Information Technology and Financials better than neutral Neutral sectors: Energy, Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate Bottom Line: Despite the recent volatility as a result of weakness in the fixed income markets, our key indicators remain supportive of additional gains in the U.S. equity market. Despite the possibility of pullbacks, our research strongly suggests that investors view them opportunistically and raise exposures in our preferred sectors and stocks if they occur.

Climbing the Wall of Worry—What Clients are Asking

Every day I have many calls with institutional clients all over the world. Their mandates are quite varied from strategic long-only portfolio managers, hedge funds, and tactical traders. During these exchanges, we have the opportunity to hear what front line investors are thinking, worried about, and what they are buying and selling. I always find speaking with the best and brightest that the industry has to offer incredibly valuable and insightful. The overall market is NOT extremely overvalued despite some areas showing some exuberant behavior. My research and historical work on valuation multiples continues to show that the most important factors that impact valuation levels are still at all-time favorable readings, which supports the current market P/E. From time to time, areas of the overall equity market get tactically extended in either direction and can have countertrend price-only moves to work off their respective extremes. What this means in plain English — sometimes stocks in short periods of time can move in ways that are not directly related to their fundamentals. This can appear odd to investors regardless of their experience and if they are either retail or institutional and can cause bad decision making. To avoid this, we use our proprietary earnings revisions metric that we call Analyst Sentiment Measure (ASM) to help us determine what the dominant trend is for individual stocks and sectors. If our earnings revisions work is supportive when price action goes against us, it is a strong likelihood the move is a countertrend move and thus the main upward price trend will return in a short period of time and this is a dip to buy. On the other hand, if the ASMs actually begin to deteriorate, the old price trend is likely over and investors should shift to selling rallies instead of buying dips. Bottomline: our works still strongly supports the Industrial sector and we expect the names to resume their outperformance. Case in point, look how DE and URI acted today. The earnings revisions for Banks/IBanks/Asset Managers started to get noticeably “less bad” in late Aug/Sept, which was a favorable development in our investment process. Our work is still quite constructive and is strengthening, which underlies his bullish outlook for the Financials sector (XLF) and many individual bank stocks, especially relative to defensive interest rate sensitive areas (XLU and XLRE). I reserve the right to change my mind as more evidence becomes available, but at the moment I remain quite skeptical about the prospects that a commodity SUPER cycle is beginning that some forecasters are starting to talk about more and more. With that being said, my work does support cyclical reflation plays and has led to our favorable view of the Materials sector (XLB), as well as many individual names within the industrial metals, chemicals, and packaging. Most preferred sectors: Consumer Discretionary, Industrials, and Materials with Information Technology and Financials better than neutral Neutral sectors: Energy, Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate Bottom Line: Our key indicators remain supportive of additional gains in the U.S. equity market. Despite the possibility of pullbacks, our research strongly suggests that investors view them opportunistically and raise exposures in our preferred sectors and stocks if they occur.

Key Indicators Point To More Upside For Equities

In conversations with clients, we are repeatedly finding that folks are not as complacent and bullish as some reports would suggest. Every client is worried about something. One of the main topics of discussion we have had with clients is whether valuations are overstretched. We would answer unequivocally that valuations are not excessive and we think they will settle at historical highs or better given the underlying secular forces supporting markets. We analyze which direction we think valuations will go based on more than ten individual factors. The three most important factors we analyze are interest rates, inflation expectations, and where we are in the Fed policy cycle. All three of these vital indicators are at ALL TIME favorable levels. Thus, we think it makes perfect sense that valuations remain at the north-end of historical ranges or indeed even higher. We are forecasting roughly 25% in OEPS for 2021 which would be roughly $178 for 2021. For 2022 he is forecasting 15% growth, which would be roughly $205. These forecasts are based on moderate additional stimulus. If the Dems are able to pass their $1.9 tn passed then the risk would be decidedly to the upside. We are operating under the assumption that fair value for the S&P 500 is about 20x-22x earnings. This would mean out current upside targets are between 4100-4500. Again though, we do believe the risk for OEPS and multiples are clearly to the upside. Growth managers have a lot of questions about what they should do. We have been recommending a bar-bell strategy anchored in growth names and have been advising our clients to augment exposure to cyclical/growth names. Our Analyst Sentiment Measure (ASM) work on growth is still constructive, so don’t abandon the area. For those uneasy about the pure Value/Cyclicals we recommend what we call ‘cyclical growth areas.’ HC Equipment, Data Processing, Movies and Entertainment and Restaurants. Our quantitative work began suggesting it may be time to start moving down the cap scale.

Looking for Additional Upside as Volatility Subsides

As we flipped the calendar from 2020 to 2021, investors were more than happy to leave the Year of the Rat and optimistically shift towards a return to normalcy and better times ahead in the Year of the Ox, which is close enough to a bull for us. January saw any unusual events like the unprecedented spectacle that occurred on 1/6 at the US Capitol, a transition of power in Washington DC, retail investors attempting to battle the Hedge Fund community, and the return to the Super Bowl of Tom Brady as the oldest quarterback to get back to the big game. The combination of these things along with many other headline news items contributed to the S&P rallying over 4% but then ending January down 1%. Many had feared that this was the beginning of a large correction in equity prices. I was not one of those as my work suggested otherwise. Thus, the weakness that occurred during the last week of January is likely over. My most aggressive tactical indicators have now flipped back to short-term bullish. Remaining above 3820 keeps me tactically bullish. I will be on alert for a downward move below 3800, which would be problematic and likely cause my models to shift back to tactically cautious/unfavorable. The trade based on our research is to be back in offense, mostly Value/Cyclicals, part Growth/FAANG. On the other side of the coin, our work suggests less exposure, or outright short positions, in defensive areas of Staples, Real Estate, and Utilities. Importantly, our underlying bullish macro catalysts haven’t changed despite the recent volatility and subsequent rally. The Fed is still likely on hold and interest rates will remain low for an extended period. Thus, the favorable liquidity environment will not be interrupted soon. The rate backdrop near record-lows remains very supportive of equities. The earnings revision data for the broad equity market, which has a big impact on our process is still robust. This shows the rate of change in the depressed future consensus profit expectations in late-March and early-April is still getting ‘less bad’ for the broad universe of names. Within both the S&P 500 and the S&P 1500 as shown by our proprietary Analyst Sentiment Measure (ASM). Most preferred sectors: Consumer Discretionary, Industrials, and Materials. With Financials and Tech also being better than neutral. Neutral sectors: Comm Services and Energy Least preferred sectors: Utilities, Staples, Real Estate, and Health Care below neutral. Bottom line: The weakness that occurred during the last week of January is likely over. My most aggressive tactical indicators have now flipped back to short-term bullish. Remaining above 3820 keeps me tactically bullish. Below 3800 would be problematic and likely cause my models to shift to tactically cautious/unfavorable.

2021 Outlook: Transitioning To Recovery, Further Gains Ahead

This week we released both our 2021 Year Ahead Outlook research report as well as our Outlook Webinar, which was f of actionable conclusions for investors. Today, we wanted to invite you to Watch The Replay, and also summarize the presentation’s bigger points. Moreover, the Webinar included 10 favorable large cap stock ideas that our research portends will likely be market beating performers. Bottom line: From current levels, our work suggests that the strategic reward/risk tradeoff for the S&P 500 is still tilted towards reward when we forecast out to year-end. We are in the early innings of a major corporate profit recovery that is being powerfully combined with massive amounts of monetary and fiscal stimulus. Thus, our research strongly suggests investors need first to be positioned to take advantage of a favorable equity environment by lowering cash levels and fixed-income allocations. Next, there needs to be some thoughtfulness regarding the two major style shifts occurring and will likely continue to maximize one's alpha: 1) Growth/FAANG to Value/Cyclicals; and 2) Large Cap to Small/Mid Cap. Main Macro Assumptions: The U.S. economy will expand between 3.7 – 4.0% yr/yr, which assumes only moderate fiscal stimulus.A global synchronous economic recovery, which helps Cyclical/Value related areas around the world. Despite being a consensus call, we expect the U.S. dollar to continue weakening. Inflation expectations and interest rates drift higher. The Fed remains accommodative for all of 2021 despite the possibility for some rumblings from the bond market vigilantes, and that the “Fed Put” will be in full force during the year. Bigger Picture Conclusions: U.S. vs. MSCI World ex. U.S. — Moving closer Neutral from longstanding OverweightStocks vs. Bonds/Cash — Continuation of our heavy Overweight for StocksLarge Cap vs. SMid — Bias down the cap scale for the first time in over five yearsOffense vs. Defense — Continuation of our heavy Overweight for OffenseGrowth/FAANG vs. Value/Cyclicals — Continuation of our strong bias towards Value but not abandoning Growth S&P 500 Targets: 2021 OEPS to end the year at $178, or roughly 25% yr/yr growth versus our expectation that 2020 will finish between $142-146, and a preliminary estimate of $205 for 2022. All based on moderate fiscal stimulus during the year and NOT the large $2T figures being discussed. Profit margins to rise as the top line begins to return to levels achieved Pre-COVID and Corporate America begins to reap the benefits of the significant streamlining of their operations and the lowering of their cost bases.S&P 500 Forward P/E multiple of 20-22x, which assumes that both inflation and interest rate expectations moderately drift up, and Fed policy to remain accommodative.S&P 500 year end price target range is 4100-4510.

Bullish on Value/Cyclicals; Growth/FAANG Still Attractive

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.

  • Alpha City
Dec 11, 2020

Shift From Growth/FAANG To Value/Cyclicals Underway

I have been commenting for several months that the broad-based earnings revisions data for the S&P 1500 names was robust and supportive of healthy equity markets, and there is NO CHANGE in this view. Importantly, this continues to be a major support for our ongoing medium-term bullish view. My research still strongly suggests that despite the regular day to-day macro news and events that are present, the biggest story/driver for markets is that we are still in the early innings of a profit recovery that is being accompanied by unprecedented monetary and fiscal stimulus. Broadly, there still remain three main areas of favorable earnings revision readings 1) Secular Growth/FAANG 2) Value/Cyclicals that are higher quality and generally more growthy (Capital Goods, Machinery, Semi related) 3) Value/Cyclicals that are part of deep recovery/Epicenter universe and deep commodity/industrial/consumer/interest rate cyclicals. At the margin, the number of names in group 1 is stable while groups 2 and 3 are seeing an increase. And digging one level deeper, earnings revisions data is more or less favorable based on size. Within Large Caps (S&P 500), the most favorable groups are Cyclicals In-Motion (1) followed by Cyclicals Recovery/Epicenter(2), and Growth(3). Within the Midcaps (S&P 400 ) and Small Caps (S&P 600 ), the most favorable names are Cyclicals Recovery /Epicenter(2), followed by Cyclicals In-Motion(1), and then Growth(3). And importantly, increase in favorable revisions data towards deep cyclicals (i.e. Epicenter) is most pronounced within small caps. At the sector level, in our latest update we upgraded Financials. We also commented about how the earnings revisions for SMID banks was improving. This trend has clearly remained in place and spread up the cap scale to large caps as well. As we look out to 2021, we are evaluating if we should raise our views on the Financials sector even higher. Stay tuned for more on this. Bottom Line: We are in the early innings of an earnings recovery cycle. I continue to recommend a barbelled portfolio approach of Secular Growth/FAANG and Value/Cyclicals stocks and encourage investors to shift from growth into value.

  • Alpha City
Dec 4, 2020

Reiterating Bullish View; Upgrading Financials & Energy

Despite the ongoing election controversies and COVID-19 cases still rising, November was a great month for equity markets. The S&P 500 rose over 10% and reached all-time highs. And importantly, there were positive developments on the vaccine front. This has shifted investors’ outlooks away from the current negative pandemic data to an optimistic future that will likely see the U.S. and Global economies start to reopen and begin the much-needed healing process. While there remain a number of uncertainties from rising COVID-19 cases, to vaccine implications, to potential fiscal stimulus packages, to who may ultimately control the Senate, I see higher highs ahead for equity markets. Our research continues to suggest we are in the early innings a powerful profit cycle that, combined with a favorable fiscal and monetary policy backdrop, will push equity prices higher. Investors should keep their focus on the bigger picture — 6, 12, and 18 months ahead. On a tactical basis, our key indicators flipped favorable on 11/2 and based on this week’s review are still rising, which keeps us tactically re-aligned with our medium-term bullish stance. Looking closer into the S&P500, our highest-frequency and most aggressive tactical tools are still rising from their last buy signals and are not yet extreme. These indicators extremely helpful in our bullish bottom call on 3/20/20 and at the end of October. I continue to recommend a barbell approach of both Growth/FAANG and Value/Cyclicals at the expense of cash, bonds, traditional defensive areas (Staples, Utilities, Real Estate, and legacy Telcos). And recommend investors continue making shifts away from Growth towards Value. This week we increased our sector weightings for Financials and Energy. In the financial sector, our proprietary indicators have improved since being clearly unfavorable for much of 2H20. And at the macro level, an eventual stimulus package, rising expectations of economic recovery and our forecast for U.S. interest rates to move higher are reassuring. Within energy, our key tactical indicators are now mixed after a long-period of being clearly negative which is a marginal improvement and brings us closer to neutral on the sector. 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.

  • Alpha City
Nov 20, 2020

Still Bullish: Continuing Drift Towards Value/Cyclicals

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.

  • Alpha City
Nov 13, 2020

Early Innings of Powerful Profit Cycle; Sector Allocations

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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