Each week, we tap the insight of Sam Stovall, U.S. Equity Strategist for S&P Global Market Intelligence, for his perspective on the current market.
EQ: The market has moved up pretty strongly since Friday. Is this mainly because of the surge in oil prices and the OPEC discussions on its production freeze?
Stovall: I think the discussion of limiting the increase of supply has helped, but I think the market had just gotten so grossly oversold that we are now in at least what would be regarded as a countertrend rally. So I think we have to see the S&P 500 break above the 1950 area before we can feel more confident that the worst is behind us.
EQ: The death of Justice Antonin Scalia over the weekend has created another potential hot button political issue with Republicans threatening to block any nomination from President Obama, essentially gridlocking the Supreme Court until a new administration. If this were to play out, what are the potential effects on the market?
Stovall: I think that it would have a depressing effect on the market because it’s only going to remind investors of the uncertainty that lies ahead with the upcoming election. No incumbent is standing for reelection, so whoever gets elected will be an unknown quantity. In addition, because the Supreme Court is now evenly split between conservatives and liberals, I think investors are again wondering how much can actually be accomplished.
People used to say gridlock is good for stocks, but the truth is gridlock is not good because things just don’t get done. As a result, it ends up increasing the uncertainty that investors have to endure.
EQ: In this week’s Sector Watch, you looked at three sectors on the S&P 500 you called B.E.T.s. Why did you decide to look at the Banks, Energy and Tech sector in particular?
Stovall: I focused on those three sectors because those are the ones that are on investors’ minds today; where we’ve got a lot of questions.
For Technology, the Nasdaq had experienced one of the bigger declines recently as investors were questioning the FANG stocks—Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG)—as well as the prospects for the growth stocks within the S&P 500. So our analytical team upgraded the investment outlook recommendation to Overweight from Marketweight based on their belief that earnings estimates are overly pessimistic, combined with very relatively low valuations for the sector as compared with the rest of the S&P 500.
In terms of Banks stocks, a lot of investors are worried that exposure to oil loans could cause many of these US bank stocks to have significant problems similar to those in 2008. We disagree. We see Energy exposure to only being 1-2%, and are actually getting more constructive on the bank stocks because of this recent decline. As a result, we have a Marketweight recommendation on Financials and have favorable investment recommendations on high-quality U.S. banks, such as BB&T Corp (BBT), JPMorgan Chase (JPM), SunTrust (STI), and U.S. Bancorp (USB), due to low energy exposure, attractive valuations, stable management, and good capital ratios.
Lastly with Energy, our feeling is that this group will remain under pressure as the earnings decline will continue to increase, not only for the rest of the 2015 reporting period but now it’s expected that earnings will decline by more than 50% for Energy in 2016. The earlier estimate had been for a decline half of that. Therefore, we currently have an Underweight recommendation on the Energy sector despite the group having four stocks with 5-STARS ratings—CONSOL Energy Inc. (CNX), FMC Technologies, Inc. (FTI), Magellan Midstream Partners LP (MMP), and Valero Energy Corp. (VLO).
EQ: Regarding Energy and bringing it back to the OPEC, could the talks of a production freeze actually spark a rebound of sorts for oil prices, and translate to a positive impact for the stocks in this sector?
Stovall: Yes, it could if they not only talk about it but actually follow through on what they’re implying on they’re going to do. That would be a positive, but remember that OPEC is notorious for making statements and not following through on those statements. Granted, a reduction in supply is what is necessary to help build the base under the price of oil. We also think that the non-OPEC nations will likely be cutting back on supply, which is good because they represent five out of every nine barrels of oils produced.
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