ERM Conclusions, Staying Bullish, Keep the Barbell

While the U.S. equity market continues to trade sideways and has been unable to make a new high since peaking on June 8th, our tools and key indicators remain bullish.

I initially turned bullish on the U.S., equity markets in late March subsequent to our key tactical indicators flipping back to favorable. Since then, I have been quite consistent and vocal about our constructive outlook and our main conclusions remain as follows:

  • Despite the possibility of short-term consolidation/pullbacks, I am constructive on US equities for 6-12months and are viewing any tactical weakness as a buying opportunity.

  • Based on our research, the low for the S&P500 is in and there is a rising probability that the benchmark index will make new HIGHS before the year is over.

  • The market is NOT extremely overvalued as some are fearing. In fact, our work is suggesting an S&P 500 target range of 3600-4400.

  • I am still recommending a barbell approach that includes a mix of FAANG/secular growth stocks and cyclicals/value as Overweights and defense and cash as Underweights.

Not surprisingly, some of the front-line Cyclical/Value impacted names (as my colleague Tom Lee refers to as “Epicenter” stocks) are showing small pauses. I view this as just part of the longer-term healing process and do not find it worrisome or a major concern.

Clearly, there are fewer favorable readings in traditional defensive areas of Staples, Utilities, legacy Telecom, and Real Estate, and that makes it harder to find interesting opportunities within these sectors (though not impossible as there are some).

On the Earnings Revision front, I am expecting to see revisions start reaching their max downside level and begin showing signs of improving as the July/August 2Q20 earnings season unfolds. This should continue to underpin our constructive outlook for U.S. equities.

What will I be looking for from our work to confirm our continued medium-term constructive outlook?

I want to be very clear that we are STILL expecting absolute earnings revisions to be lowered for at least another 2-3 months. However, our key proprietary revision indicators should continue looking LESS BAD and eventually start moving towards outright GOOD. This will be critical, and, if I am right, the backdrop for equities will stay constructive for the remainder of 2020 and beyond.

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