prepared by Ryan Lewenza, CFA, CMT, Senior Vice President, U.S. Equity Research,
TD Wealth, Portfolio Advice and Investment Research
Mid-Year Update
- In the “risk-off” environment seen for much of Q2, small caps and technology were hit the hardest, with the Russell 2000 Index and the Nasdaq Composite Index down 3.83% and 5.06%, respectively. The defensive telecommunications, utilities, and consumer staples sectors outperformed, gaining, 12.63%, 5.46%, and 2.11%, respectively. The cyclical sectors underperformed with financials down 7.27%, energy off 6.53%, and information technology declining 6.96%. While Q2 was a more difficult trading environment than Q1, it is important to note that the S&P 500 Index (S&P 500) is still up 8.31% year to date.
- Europe continues to be the most significant risk to the global markets, with news from the region largely driving the volatile day-to-day price action. Greece, with its potential to default (again) on its debt and possible exit from the eurozone, remains front and centre. However, the focus is quickly turning to Spain, whose economy at US$1.4 trillion is nearly 5 times larger than that of Greece.
- The key question is whether the eurozone debt crisis will escalate further, and push the global economy into a recession. Unfortunately the problems are largely political, making it difficult to predict one way or the other. All of this uncertainty bears a defensive posture at this time.
- Looking at simple P/E ratios, equity valuations look quite reasonable, and even cheap in certain areas of the market. However, with the prospect of slowing earnings and increasing global risks, we believe stocks will be hard pressed to see any significant P/E expansion, and therefore maintain our S&P 500 year-end price target range of 1,290-1,340, which assumes a year-end P/E target range of 13- 13.5x.
- Stepping back from the day-to-day market gyrations, we believe the S&P 500 will continue to trade range-bound between 1,200 and 1,400 through the summer, as the markets weigh the negatives of the European debt issues and slowing growth, with the positives of still healthy corporate earnings, reasonable valuations and supportive monetary policies.
- With the heightened risks we recently
- upgraded consumer staples to overweight from market weight.
- We continue to recommend an overweight in health care.
- Our sole cyclical overweight position is the information technology sector.
- The energy, utilities, telecommunications and industrials sectors remain at market weight.
- Finally, we maintain our underweight recommendation for the financials and consumer discretionary sector.
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