by Ryan Lewenza, Senior U.S. Equity Analyst, VP, TD Wealth
Attached is our U.S. Equity Strategy Q1/13 Update report. Highlights include:
· It has been a strong start to the year for U.S. equities. The S&P 500 Index (S&P 500) marked a new milestone after it recently broke above its previous all-time closing high of 1,565. The key U.S. benchmark index gained 10% in the quarter. On a sector basis the top performing sectors in Q1 were health care (15.2%), consumer staples (13.8%), and utilities and consumer discretionary (11.8%). The weakest sectors in Q1 were the materials (4.2%) and information technology (4.3%). Typically in bull markets the cyclical sectors tend to lead, however this has not been the case so far in 2013, which is a concern for us.
· In our view, the two most important questions with respect to the stock market outlook are: 1) will the S&P 500 break and hold above the key 1,565/75 resistance levels, thus ending the 13 year secular bear market; and 2) what will be the key driver of the stock market through year-end – the Federal Reserve’s (Fed) unconventional policies (i.e., quantitative easing – QE) or improving fundamentals?
· Given our expectations for modest profit growth in 2013, further market gains will need to be driven by multiple expansion. Currently, the S&P 500 forward P/E is 14x, which is in line with its long-term average. While we expect a modest reduction in forward earnings estimates, if the forward P/E expanded by just 1 multiple point, from 14x to 15x, this would translate into roughly a 100 point move for the S&P 500, or 5-6% from current levels.
· From a technical perspective we remain bullish on U.S. equities, and see little evidence of a longer-term top forming. Looking at price action, the S&P 500 remains in a confirmed uptrend, and is trading above its rising 200-day moving average (MA). While our key longer term technical indicators remain bullish we are growing increasingly concerned about a potential pullback, which could unfold over the seasonally weaker summer months.
· From a sector perspective we remain overweight the industrials, information technology and health care sectors. We are downgrading the materials sector to underweight, in line with the consumer discretionary and telecommunications sectors. Energy, utilities, financials and consumer staples remain at market weight.
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