Key changes from March report
- Reduced S&P 500 yearend fair value target to 4,800 – 4,900.
- Slightly reduced equities overweight and fixed income underweight
- Increased yearend U.S. 10-year Treasury yield forecast to 2.25% – 2.5%.
- Upgrading healthcare view to positive
- Downgrading financials view to neutral from positive
- Upgrading consumer staples and utilities views from negative to neutral
- Downgrading consumer discretionary and industrials views to negative from neutral
- Upgrading High Yield corporates from negative to neutral
Stocks rebounded from down months in January and February as the S&P 500 Index returned a solid 3.7% in March. The gain, which came generally in the absence of good news, left the index down 4.6% year to date as of March 31.
- Little clear progress was made toward a ceasefire in Ukraine.
- Inflation surged and economic activity slowed.
- The 2-year/10-year yield curve inverted, a sign of increasing recession risk over the next year or two.
- During March the bond market priced in three additional quarter-point Federal Reserve rate hikes for 2022, bringing the total to eight.
- The 10-year U.S. Treasury yield spiked more than 50 basis points (0.5%) during the month.
Higher interest rates were a key factor in the decision by the Strategic and Tactical Asset Allocation Committee (STAAC) to reduce the year-end S&P 500 Index fair value target range to 4,800—4,900, based on a price-to-earnings ratio (PE) of 20—20.5 and our 2023 earnings per share (EPS) estimate of $235. Higher inflation led to our increased 10-year Treasury yield target. The risk that high inflation trickles down to U.S. consumers, along with Russian energy disruption, drives our lowered GDP forecasts.
- We continue to recommend a slight overweight to equities versus bonds for suitable investors as still-solid fundamentals outweigh pressure on valuations.
- Our value and growth style views remain neutral, but slower economic growth, a flat yield curve, and earnings set up well for growth.
- As the economic cycle matures, we would expect large caps to resume leadership, though small caps valuations are attractive.
- We continue to recommend a slight underweight allocation to fixed income where suitable as higher rates may put additional pressure on bond returns.
- Although we’ve seen a meaningful move higher in yields this year, broadening inflationary pressures and the reduction of Federal Reserve (Fed) policy support may push yields still higher in the months ahead. We’ve increased our yearend target for the 10-year Treasury yield to 2.25% to 2.5%.
- Shorter maturity corporate credit and high yield bonds (for income-oriented investors) are starting to look more attractive.
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Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.
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All index data from FactSet.
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