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Can Stock Markets Keep Rising? Zacks May Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full May Market Strategy report To access the full PDF, click here

 

I. What’s ‘Fair Value’ on the S&P 500?

Always keep up-to-date. Apply a 12M forward-looking COVID19 earnings landscape…

A. With Spring Well Underway, Time to Study 2H-21 and 1H-22

Focus on the EPS growth flowing from the most cyclical sectors.

Top earning stock groups come to life, even more, as more vaccine distribution raises mobility.

 

  • - Industrials (+91.4%),
  • - Consumer Discretionary (59.1%),
  • - Materials (+51.9%),
  • - Financials (+42.0%),
  • - Communication Services (+22.3%),
  • - Info Tech (+21.1%),
  • - Health Care (+13.7%),
  • - Real Estate (+5.8%),
  • - Consumer Staples (+5.7%),
  • - Utilities (+2.6%).


In sum, play cyclicals on a 2H-21 and 1H-22 EPS take-off. That is the forward bull play.

S&P 500 “Bottom’s Up” consensus shows investors a nifty rise across the quarters of 2021 and 2022.

Q4-19        $41.79
Q1-20        $33.35
Q2-20        $28.25
Q3-20        $39.41
Q4-20        $42.32

Q1-21        $46.58
Q2-21        $43.73
Q3-21        $46.80
Q4-21        $49.08
Q1-22        $48.81
Q2-22        $50.54


However, the pandemic is not over. Far from it.

To May 3rd, there were 153 million cases and 3.20 million deaths worldwide. In that, there were 32.4M USA cases and 577K USA deaths.

To early May, COVID cases have accumulated most in the USA, India, Brazil, France, Turkey, Russia, the U.K., Italy, Spain, Germany, Argentina, Columbia, Poland and Mexico, in that order.

Note: India is near the top of the updated May 2021 list. As we have already made note of, their vaccination programs are lagging. Vaccines from outside are sorely needed.

B. My Stock Strategist Thoughts

Regardless, carry on with regularly-spaced, overweight equity asset allocations.

The Fed and the other G10 central banks have share buyer’s backs. Respectable stocks are the way to go.

Consensus “bottom-up” revenue growth projections for 2021 show us a +10.9% rise.

Along with that, 2021 annual earnings should snapback +31.7%.

Zacks “fair value” earnings call is based on a full year 2H-21 and 1H-22 forward look ($192). Add on a huge dollop of Fed and G10 CB-driven valuation upside to that.

Zacks thinks 4,100 on the S&P 500 by the end of 2021 is a valid target.

Last year, very bullish top-down Wall Street strategists called for the S&P500 to end 2020 trading at 3,450. It ended at 3,756.

The latest 2021 “bottom-up" call is for the S&P500 to reach 4,649 in 12 months.

II. Zacks May Sector/Industry/Company Telescope

The Zacks Rank system showed 3 strong sectors, with many industries clearly bullish.

 

  • - Info Tech was the clear top sector again; strong across all industries
  • - Two cyclical sectors – Materials and Industrials – also came out on top
  • - Think Metal Fabricating Construction-Building Services, Airlines and Machinery-Electrical
  • - Or Steel and Building Products-Construction Materials


Energy and Financials were Attractive sectors, with Banks & Thrifts, Investment Banking & Brokering, and Major Banks strong. Wider yield spreads and higher saving rates help. Loan Losses were greatly reduced. Trading profits were strong too.

Consumer Discretionary was Market Weight. Consumer Staples looked Unattractive.

At the back, defensives. Telcos and Utilities were at Market Weight and Unattractive.

Health Care stayed Unattractive for a 2nd month. However, Medical Care led this month.

(1) Info Tech stayed Very Attractive. Computer-Office Equipment, Misc. Tech, Computer-Software Services, and Electronics-Semiconductors (with a global supply shortage), all of those look excellent.

Zacks #1 Rank (STRONG BUY): Google (GOOGL - Free Report)

(2) Industrials stayed Very Attractive. Metal Fabricating, Construction-Building Services, Airlines (a noted upgrade) and Machinery-Electrical, were the top industries.

Zacks #1 Rank (STRONG BUY): MKS Instruments (MKSI - Free Report)

(3) Materials rose to a Very Attractive from Attractive. Steel, Building Products- Construction Materials, and Metals-non-Ferrous, remained very strong.

Zacks #1 Rank (STRONG BUY): Owens Corning (OC - Free Report)

(4) Financials sunk to Attractive from Very Attractive. Banks & Thrifts, Investment Banking, and Major Banks look good. Higher rate spreads and savings help all of these.

(5) Energy sunk to Attractive from Very Attractive. Oil & Gas Integrated looked best.

(6) Consumer Discretionary sunk to Market Weight from Attractive.  Autos/Tires/Truck and Home Furnishings were strong (a remote working pair) and also showed the stimulus check buyer and saver is now in play.

(7) Consumer Staples rose to Unattractive from Very Unattractive. Tobacco, Food/Drug Retail (vaccine shots!), and Agri-business (commodity price boom) looked best.

(8) Health Care stayed Unattractive. Medical Care looked the best.

(9) Communications Services stayed Market Weight. Utility-Telephone the best.

(10) Utilities sunk to an Unattractive rating from Market Weight.

III. Final Insights

A. In terms of underlying earnings, major U.S. publicly-listed firms are widely pegged to strongly recover across all of 2021.

For Q1-2021, the blended earnings growth rate for the S&P 500 is +45.8%.

If +45.8% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q1 of 2010 (+55.4%).

 

The estimated (year on year) EPS growth rate for the S&P 500 for 2021 is +31.7%. This is 3X the 10-year average (annual) EPS growth rate of +10.0%.

If +31.7% is the actual growth rate for 2021, it will mark the largest annual EPS growth rate for the index since 2010 (+39.6%) too.

B. Why Big Upgrades to Earnings Growth Rates?

First, it appears analysts may have been too aggressive in their downward revisions to EPS estimates during the first half of 2020 at the height of the COVID-19 lockdowns.

Second, it appears expectations for overall U.S. macro growth have been rising as well.

Third, rising commodity prices and interest rates appear to be driving some of the upward revisions to EPS estimates.

Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal.

C. How Did Stock Markets Price This In?

Next are April 30th, 2021 YTD S&P 500 sector returns:
 

There are 7 cyclical sector leaders:
 

  • Energy $XLE: +29.9%,  
  • Financials $XLF: +22.7%,
  • Real Estate $XLRE: +17.2%,
  • Communication Services $XLC: +16.1%,
  • Industrials $XLI: +14.9%,
  • Materials $XLB: +14.3%,
  • Consumer Discretionary $XLY: +10.2%,


And 4 sector laggards:
 

  • Info Tech $XLK: +7.0%,
  • Health Care $XLV: +6.7%,
  • Utilities $XLU: +6.2%,
  • Consumer Staples $XLP: +2.5%.


That’s it for this intro. Please enjoy the entire published Zacks Market Strategy report.

John Blank

 

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