Page 16 - ISQ January 2021

INVESTMENT STRATEGY QUARTERLY

In a bear case scenario, we see the S&P 500 downside at 3,200. If the most by the pandemic should generally see the greatest upside.
virus concerns linger for longer and hamper the reopening pro- Many of these areas have seen sharp outperformance since early
cess and pace of economic recovery (i.e., GDP growth is closer to November on vaccine and stimulus optimism, so from current levels
3% in 2021), we believe earnings revisions could break from their we recommend a pragmatic approach to portfolio repositioning.
historical upward trend out of recessions and finish near $160. In For this reason, we believe it is important to maintain a healthy
this scenario, tax increases also become an overarching theme for allocation to the areas operating best through the pandemic while
the longer-term outlook and outweigh the benefits of spending also accumulating areas with the greatest leverage to the economic
increases. As investors discount the impact from these tax changes recovery. Thus, our current overweight sector recommendations
to 2022 earnings, the result is a lower P/E. We use a 20x P/E, over — Technology, Communication Services, Health Care, Consumer
10% lower than our base case P/E assumption of 23x, in this sce- Discretionary, and Industrials — reflect a combination of this strategy.
nario- resulting in a S&P 500 bear case target of 3,200.
We maintain equal weight recommendations to the also cyclical
Financials and Materials sectors, and continue to underweight
PORTFOLIO POSITIONING
Energy for now.
At the sector level, the pandemic created a bifurcated market in
which roughly half of companies saw positive earnings growth this
year (i.e., Technology-oriented, Health Care, Consumer Staples), “ …leads us to a constructive view on
while the other half saw their fundamentals decline substantially small caps as they have more leverage to
(i.e., small caps, Energy, Industrials, Financials, and select consumer
areas). Also, this spread was wide with a median earnings growth the economic recovery that we believe
rate of 10% for the ‘winners’ and a median earnings contraction of will transpire in 2021. ”
19% for the ‘losers.’ As the economic reopening gains momentum
in 2021, the more economically-sensitive areas that were beaten up

Sector Views

OVERWEIGHT:

Technology Health Care Consumer Industrials Communication
Discretionary Services

EQUAL WEIGHT:

Financials Materials

UNDERWEIGHT:

Consumer Staples Utilities Real Estate Energy

Source: Raymond James Equity Portfolio & Technical Strategy as of 28/12/2020
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