October Earnings Revision Review; Medium Term Bullish

Last month, we commented that our earnings revisions work for the broad equity market had finally cooled somewhat. We also indicated that it was likely that it would not be long lasting or problematic. Well, the October review showed stabilization and minor improvement and suggests will continue through year end supporting our ongoing medium-term bullish view.

While many of the bearish forecasters view the ongoing rally is as unjustified and disconnected from reality, they are still only focused on the price moves of certain sectors and stocks. They continue to underappreciate the powerful combination of positive earnings revisions as measured by our proprietary Analyst Sentiment Measure (ASM) indicator, historically low interest rates, record monetary and fiscal stimulus, and the potential end of crippling lockdowns in the coming 3-6 months.

When looking at the broad-based S&P 1500 Index on cap size basis, Large Caps (S&P 500) revisions are still the best followed by Midcaps (S&P 400) and the weakest relative revisions are within the S&P 600 Small cap index. I continue to believe that this will stay in place until COVID-19 starts moving to the rearview mirror. When that does happen, I expect a major shift that will contribute to change in relative performance trends as well.

Broadly, there still remains two main areas of favorable readings. One is dominated by Secular Growth/FAANG and the other is the Value/Cyclicals. And there has been a subtle shift away from Growth towards Value.

Going forward, I expect the environment to shift from a beta market to a more typical alpha market where idiosyncratic factors become important again, and it will be even more critical to be in the right stocks as differentiation returns. our proprietary methodology will continue to be extremely valuable for the remainder of the year highlighting the best stocks to own.

Last week I introduced my FSI Sector Allocation ETF driven strategy. This strategy seeks to increase alpha and lower risk by investing in those sectors of the S&P 500 that should Outperform, while cutting exposure to the sectors that should Underperform. This balancing should help deliver more profits in a bull market and reduce losses in a bear market. I encourage you to take a look at the comprehensive methodology which can be found on here.

Bottom line: The important drivers for higher equity prices are still in place. Our work suggests that investors should be tactically cautious and allocate additional equity exposure within the sectors supported by our proprietary research tools.

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