Weekly Investment Strategy

Key Takeaways

  • Info ‘Technology’ Boasts the Strongest Aggregate Beats
  • The ‘Art’ of Interpreting Earnings & Future Guidance
  • Lower for Longer Yields Provide ‘STEAM’ for Equities

Today, November 8, we celebrate National S.T.E.A.M. (Science, Technology, Engineering, Art & Mathematics) Day. This date is appropriate as “NOV-8” is a play on the word ‘IN-NOV-ATE,’ an attribute necessary to maintain the competitive edge of the US economy. Many schools have adopted these areas of focus to instill the value of a well-balanced education in students. As your Investment Strategy team, it is our responsibility to be innovative and well balanced in how we conduct, construct and disseminate our market views. Admittedly, while there are clearly S.T.E.M aspects to analyzing historical numbers and trends, there is an ‘Art’ to how we convey our outlook. Consistent with our approach, we overlay the S.T.E.A.M. subjects to our assessment of the third quarter earnings season.

  • Science Behind The Strength of Health Care | With less than 10% of the S&P 500 market capitalization left to report, the Health Care sector has been a standout with 85% of companies beating EPS estimates. The magnitude of beats has been impressive too, with companies topping estimates by 6.7% on average, well above the previous 20Q average of 4.9% and the S&P 500 average of 3.9%. These results arrived at an opportune time, as political risk associated with Medicare-For-All proposals have kept the sector ‘under the microscope.’ Health care costs will undoubtedly remain a top concern amongst both parties as we go further into the election cycle, but we think the sector’s underperformance is overdone. Health Care has trailed the S&P 500 by 8.8% over the last 12 months, and is trading at a significant discount (~15%) to the broader market. Favorable demographics, attractive valuations and earnings momentum lead us to remain constructive on Health Care.
  • Technology At The Top | While technology is ever-changing, one thing has remained the same—the sector’s outperformance. Technology is up ~40% year to date, outpacing all other sectors by at least 10% and the broader market (S&P 500) by ~15%. Therefore, it is no surprise that the sector has had the strongest aggregate beats of any sector at 7.5%, topping its 20Q average of 6%. While trade tensions and a stronger dollar could weigh on the outlook, 2020 earnings are expected to rise 10% year-over-year. This estimate has been resilient throughout this earnings season, rising 0.5% and making it the only sector to see positive revisions. The Technology sector remains one of our favorite sectors due to the secular trend of rapid advancements across our entire economy, from artificial intelligence to robotics to medical enhancements to communications. In the near term, continued strong earnings, attractive valuations, buybacks and seasonality reinforce our positive view.