2021 3rd Quarter Equity Market Update

PUBLISHED BY RAYMOND JAMES & ASSOCIATES

Michael Gibbs, Director of Equity Portfolio & Technical Strategy

Joey Madere, CFA

Richard Sewell, CFA

For the full 3rd Quarter Equity Market Update- Click Here

The S&P 500 achieved its 6th consecutive quarter of quarterly gains, narrowly finishing in the green by 0.23%. Similar to history, the month of September was not favorable for equities with the S&P 500 down 4.76% (which compares to the average decline of 0.6% for September since 1960). Despite some mounting concerns such as: narrow participation could make the market susceptible to pullbacks, slowing momentum in the macro data, rising inflation, COVID cases, supply chain issues, China (regulatory tightening, slowing macro, and debt contagion fears), elevated valuations, tax changes and debt ceiling, we continue to believe the positives outweigh the negatives and raised our year-end price target to 4613 for 2021 and 4950 for year-end 2022. While pullbacks are possible, the market has remained resilient in the face of the mounting wall of worry and has not experienced an intra-year decline greater than 6% through the end of September.

Earnings, in our opinion, will continue to be the key driver of equity returns this year and next as some valuation normalization (off elevated levels) transpires. While inflation and rising input costs will be a concern for investors, we believe, at this point, the sales outlook for the S&P 500, aided by above trend GDP growth (the Fed is projecting 2022 GDP growth of 3.8%), will continue to grow faster than overall input costs, which should lead to margin expansion and continuation of earnings growth. As such, we took our 2021 EPS estimate to $205 (up from $200). For 2022, we incorporated a 25% corporate tax rate into our estimates, which lowered our estimate by ~3-5%, but remain above consensus estimates with our new estimate of $225. Without the higher taxes, our 2022 estimate would have moved higher.

We continue to see many divergences emerge in the market in which the actual data or trading patterns often differs from the logical belief based on the current headlines, and the results influence our positive bias for equities. Most importantly, earnings continue to move higher, which has been highly correlated to the S&P 500 performance historically and credit spreads continue their downward path, an important indicator to watch as widening spreads tend to be associated with concerns of a worsening macro environment, which we believe is positive for risk-on assets. Additionally, the relative performance of the Consumer Staples continues to be at the low end of its range, which we believe maintains a pro-cyclical bias to the market. In a diversified portfolio, we remain positive on US large-cap and continue to see opportunities to add small-caps (as growth and valuation remain attractive).