Here is Ryan Lewenza's (TD Wealth, VP and Sr. U.S. Equity Strategist) mid-year update on the U.S. equity markets.
U.S. Equity Strategy - 2013 Mid-Year Update
Key highlights of the report include:
· Despite the recent jump in volatility and the 4% drop in the S&P 500 Index (S&P 500) from its year-to-date (YTD) high of 1,669.16, the S&P 500 was still able to deliver a positive 2.4% return in the second quarter. With the continued gains in Q2/13, the S&P 500 is up 12.6% YTD, which marked the strongest first-half return since 1998. The Nasdaq Composite Index posted a stronger gain of 4.2%, while small caps edged out their large-cap peers, and value outperformed growth by 100 basis points in the quarter.
· We believe that the equity markets are in a major adjustment phase, where the markets are beginning to price in a reduction, and inevitable end of the U.S. Federal Reserve’s (Fed) quantitative easing (QE) policies.
· Economic momentum and growth in H2/13 is likely to improve, which if correct, should support corporate earnings and U.S. equity markets.
· We are raising our S&P 500 full-year earnings forecasts from $104/share to $108/share given better-than-expected Q1 earnings results and our belief of a stronger second half of the year. Combining our new, higher EPS target with a projected forward P/E of 15.2x, our year-end price target increases to 1,640 from 1,490. While we believe the equity markets are likely to trade more range-bound through the summer/fall period, as the markets begin to price in a less accommodative Fed, we do see the potential for a seasonal rally in Q4, on the back of improved growth and sentiment around stronger earnings growth in 2014.
· We expect the ongoing rotation from the defensive sectors to cyclical sectors to continue in H2/13 and therefore recommend investors look to increase their exposure in the information technology and industrials sectors through the summer. With our belief that interest rates are now in a new higher trading range, we are making one change to our sector recommendations by downgrading the utilities sector to underweight.
· From a sector perspective we recommend an overweight in the industrials, information technology and health care sectors. We are underweight the consumer discretionary, materials, utilities and telecommunications sectors, while market weight the energy, financials and consumer staples sectors.
You may read or download the entire report from the slidedeck below:
