U.S. Equity Strategy, Q4 2012
October 2, 2012
Attached is Senior U.S. Equity Analyst, Ryan Lewenza's (TD Wealth) U.S. Equity Strategy Q3/12 Update report.
Highlights include:
Ā· The good times keep on rolling for U.S. equities, with the S&P 500 Index (S&P 500) gaining 5.8% in Q3/12 and 14.6% year-to-date (YTD). Technology continues to outperform, with the Nasdaq Composite up 6.2% in the quarter and 19.6% YTD. It made little difference in returns if one made a growth or value call, with both indices gaining roughly 5.7% in Q3/12. Small caps lagged modestly, with the Russell 2000 Index up 4.9%, however small caps started to perk up late in the quarter.
Ā· Over the last quarter we have witnessed a schism between equity returns and underlying fundamentals, with stocks continuing to rally in the face of weaker economic data. In our view, investors are overlooking the weakening economic trends, and focusing more on the recent announcements of additional liquidity injections from a plurality of central banks.
Ā· U.S. GDP growth averaged 1.8% in H1/12, with TD Economics forecasting a slower 1.6% for H2/12. For 2013, TD Economics expects growth to be below-trend at 2%, with āfiscal austerity likely to be the major factor restraining the pace of growth.ā
Ā· U.S. corporate profits have been very strong and supportive for equities over this cycle, however, profit growth is slowing materially. On a quarterly basis, earnings growth has slowed from 9.7% in Q1/12 to flat growth in Q2/12. Based on consensus estimates, earnings growth is forecasted to go negative (-2.2%) in Q3/12, which would mark the first negative quarterly growth rate since 2009.
Ā· We are introducing our 2013 S&P 500 earnings forecast of $102.25, which based on our estimates would represent profit growth of 3.3% in 2013, compared to 7.1% expected for 2012.
Ā· The technical profile for the S&P 500 remains bullish. While we believe the market gains are likely to be more muted under QE3, than those seen during QE1 and QE2, we still see the potential for another push higher into Q4/12. Under this premise, we could see the S&P 500 make an attempt at the 2007 highs of 1,500-1,550.
Ā· Given the conflicting forces of weakening economic growth and central bank liquidity, we continue to believe a barbell approach is best in sector positioning, as it provides a mix of cyclicality and defence in U.S. portfolios. We recommend an overweight in the information technology, consumer staples, and health care sectors. We are adding telecommunications to our underweight sectors, which currently include the financials and consumer discretionary.
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