The following is an excerpt from Zacks Chief Strategist John Blank’s full Mar Market Strategy report To access the full PDF, click here
A Strong Start to the Year
Across January and February, a multi-week 2019 ascent produced a stellar +11.8% S&P 500 total return. This was the strongest trading start in 30 years.
I remain bullish on U.S. stocks across 2019, and can get bullish on global stocks at some point.
Yet there are real issues just ahead…
Q1 Earnings Show Up as Negative
Here is how to squarely sum up the current U.S. large cap earnings outlook -- duly incorporating a soft look ahead on the coming Q1-19 earnings season -- but affirming a better showing from later quarters in 2019.
This was written with March 1st data. At this point in time, 99 companies in the S&P 500 index had issued EPS guidance for Q1-19. Of these 99 companies, 73 issued negative EPS guidance and 26 issued positive EPS guidance. The percentage of companies issuing negative EPS guidance was 74% (73 out of 99). This mark came in a tad above the 5-year average of 71%.
Look back on last quarter and last year first: For Q4-18, companies reported earnings growth of +13.1% and revenue growth of +5.8%. For CY 2018, companies reported earnings growth of +20.0% and revenue growth of +8.7%. In short, I see less lift last quarter relative to last year.
Look ahead: Analysts expect a true decline in earnings in Q1-19 and low, single-digit growth in earnings in Q2-19 and Q3-19.
Here’s the real issue: Does the EPS drop just one quarter?
S&P 500 Stuck at 2800
Year-to-date, three pillars of support could have propelled the U.S. stock market higher:
- A more dovish Fed, alongside a softer U.S. dollar (Powell’s “patience,” bingo)
- A year-over-year increase in S&P 500 earnings for calendar year 2019, (it’s +4.1%, bingo) and
- A positive resolution to the U.S./China trade spat (close? with lots of pumping!)
The slingshot share price recovery we just enjoyed suggests a combination of factors. There was positive progress on all three pillars of support the first two months of the year.
Now, welcome to March. A relatively uninspiring period for the S&P 500 index has gotten underway. This key large-cap index is now trading in a tight range.
Topside resistance at the S&P 500 level of 2,800 continues to hold (for now) as the index fails to consolidate above it each trading day. This, in turn, suggests to technical analysts that the multi-week move to the upside is somewhat exhausted.
Near-term support for the S&P 500 index is situated at 2,730 to 2,740.
Stiff resistance is expected to persist right at that mark: 2,800.
This served as a barrier to more S&P 500 upside on several occasions last year.
"People seem to be very focused on technicals and ... this will be the fourth test of this resistance since the peak of the market at the end of September," said Dan Suzuki on CNBC. He serves as a portfolio strategist at Richard Bernstein Advisors.
He noted that after reaching the high of 2,940, it initially fell to 2,728 in a few weeks.
"Every time the market has gotten to 2,800 or thereabouts, it's fallen, and so it's failed there," he said. "It hit 2,800 in mid-October and then fell pretty significantly. It retested it in early November, fell again, retested almost at 2,800 in December, and that's when we saw the big December correction, and now we're back to that level. There's a huge amount of focus on it."
Suzuki said the S&P 500 level is even more important because so many traders have set computer programs with key technical levels in mind.
"If we were to break out, there might be some further impact from those (algo) players to push the markets higher," he said.
Zacks March Sector/Industry/Company Telescope
At 2,800 on the S&P 500, this equity market basically met the ‘fair value’ level. Stiff technical resistance comes after a big, big 2-month rally. I see two defensive sectors on top of our list this month, too: Health Care and Consumer Staples.
Want the cyclical bright spot? It is the strong upgrade to the Industrials sector. This is worth noting, due to cap-ex likely rising. The industry strong spots are Aerospace & Defense and Airlines. Air travel and freight are moving the volume.
Materials and Info Tech put in a poor sector showing. This means the Global Economy is weak. Those are the most globally exposed S&P 500 sectors.
(1) Health Care moves up to Very Attractive from an Attractive sector. The leader (with strong demographics) is Medical Care again.
Zacks #1 Rank (STRONG BUY) Stock -- The Ensign Group (ENSG - Free Report)
The Ensign Group, Inc.'s independent operating subsidiaries provide a broad spectrum of:
- Skilled nursing and assisted living services,
- Physical, occupational and speech therapies,
- Home health and hospice services, and
- Other rehabilitative and healthcare services at healthcare facilities, hospice agencies, home health agencies and home care businesses.
These are located in California, Arizona, Texas, Washington, Utah, Idaho, Colorado, Nevada, Iowa, Nebraska, Oregon, Wisconsin, Kansas and South Carolina.
(2) Industrials move all the way up to Very Attractive from Unattractive. The leaders are Aerospace & Defense and Airlines.
Zacks #1 Rank (STRONG BUY) Stock -- Air China (AIRYY - Free Report)
Air China Limited provides airline and airline-related services. Air China Limited is headquartered in Beijing, the People's Republic of China.
(3) Consumer Staples move up to Attractive. The leaders are Agri-business and Soaps & Cosmetics.
Zacks #1 Rank (STRONG BUY) Stock -- Wal-Mart de Mexico SA (WMMVY - Free Report)
Wal-Mart de Mexico ADRs. The sister company of the U.S. parent operates 587 commercial units, including self-service stores, department, and restaurants.
(4) Communication Services stays a Market Weight. Telco Services looks best again.
(5) Consumer Discretionaryremains a Market Weight. The leaders are Apparel, Media and Electronics. Publishing looks awful. Ditto Home Furnishing-Appliance.
(6) Financials stay a Market Weight. The solitary leader is Insurance.
(7) Utilities fall to Market Weight from Attractive. Spring is weather. Better weather means less excess power use.
(8) Energy Moves up to Unattractive from Very Unattractive. Coal is the bright spot again.
(9) Info Tech moves down more to Very Unattractive from Unattractive. The best is a neutral call on Computer-Software Services. Semis look weak.
(10) Materials fall to Very Unattractive from Unattractive. The Metals Non-ferrous industry is the sole bright spot.