For Immediate Release
Chicago, IL – May 9, 2022 – Today, Zacks Market Strategy feature highlights EOG Resources (EOG), Reliance Steel & Aluminum RS, and United Health Group UNH.
A Return to Fundamentals: Zacks May 2022 Market Strategy
The following is an excerpt from Zacks Chief Strategist John Blank’s full May Market Strategy report To access the full PDF, click here
Yes. A US stock market correction happened across the first months of 2022.
This reset has been broad and encompassing. Valuations excesses were obvious.
Looking back, a peak on major US share index charts began showing up in November 2021, starting with the tech-heavy Nasdaq.
However, with the YTD return for the S&P 500 down -13.0% to May 5th, I think you might be surprised by the following simple math exercise. Pleasantly surprised.
Applying the latest fundamental earnings data, in a straightforward manner, I can make sense of the latest summary S&P 500 index valuation numbers. no tricks.
Yes, Fed tightening is responsible for the latest correction.
In turn, old-school fundamentals — driving stocks — got restored as a competent exercise.
II. Want my updated stock strategist thoughts?
To May 4th, here is our latest outlook on S&P 500 EPS and revenue fundamentals:
2022 Zacks data show +7.6% EPS growth and +8.5% revenue growth
2023 Zacks data shows +9.7% EPS growth and +2.8% revenue growth
Zacks “fair value” S&P 500 earnings call is based on a 50% 2022 forward look ($222.19) and 50% 2023 (another ~10% added up to $243.98).
That is $233.09 multiplied by 18 = 4,195.
Surprise, surprise! This value is around where the S&P 500 trades at the moment.
Add on any Fed and G10 central bank-driven valuation upside to that.
Zacks now has 4,800 at Year End 2022 as our ‘fair value’ target.
III. Top-Down S&P 500 Year-end 2022 Targets
To May 5th, 2022, the S&P 500 YTD loss stood at -13.0%. Last month, it was -4.95%.
All three prior years recorded well above average annual S&P 500 returns:
· In 2021, the annual S&P 500 share gain was +26.9%
· In 2020, the gain was +18.4%
In 2019, the gain was +28.9%
The historical expected annual return (using data from 1930 to 2021)? This is +7.9%. In short, blunting prospects for 2022, big share gains got booked across three prior years.
Broad large-cap US index valuations stay rich, but are much more respectful of recent history now.
Adding to the US investor equity complacency, factor in investor recency bias:
5 of the last 6 years (2016, 2017, 2019, 2020 and 2021) were good to equities
2021 showed negative returns for IG Bonds, EM Debt, EM Equities, Gold and Long Term (LT) Government Bonds
We remain underweight bonds in 2022
Yes. Last year was great for US stocks. This year, headwinds weigh on lofty large-cap US stock index valuations, and those headwinds likely stay in play across 2022.
The major headwinds are:
A rapid ascent by commodity and oil price effects produced by a Russia-Ukraine war
A Fed “QE” exit, and
A more rapid Fed Funds rate hike approach to a terminal 2.5% to 3.5% long-term, risk-free, US Treasury “neutral” rate
Now, let’s turn to assessing the latest sector and industry fundamentals, driving large cap stocks earnings.
IV. Zacks May Sector/Industry/Company Telescope
Zacks Ranks show just one Very Attractive sector in May: Energy. The Energy industries maintain significant strength from high oil and natural gas prices, and good electric demand.
Three sectors (Industrials, Health Care and Materials) look Attractive. Medical Care got a noted upgrade this month. Metal Fabricating is great, and Steel and Metals Non-Ferrous are still hot.
Both Info Tech and Financials fell back this month. Office Equipment. and Semis only Market Weight now. Banks-Major fell on recession worry. Stock correction hurt brokerages and investments.
Consumer Discretionary fell to Unattractive. Strong auto prices still keep that industry up.
Utilities stay at Unattractive.
Consumer Staples stayed at Very Unattractive for another month. Agri-business, with hot agriculture prices, is the exception. Other industry groups suffer from accelerating prices, limiting growth in consumer spending.
(1) Energy is clearly the top sector and stays firmly at Very Attractive in May. Tops are Oil E&P, big integrated firms, Alternates, Oil-Misc. and Pipelines, in that order. Coal and Oil & Gas Drilling are just OK.
Zacks #1 Rank (STRONG BUY) Stock: EOG Resources
(2) Industrials fall to Attractive from Very Attractive. Metal Fabricating and Pollution Control (Biden infrastructure?) and best. Transport, Conglomerates and Business Product were next.
Zacks #1 Rank (STRONG BUY) Stock: Reliance Steel & Aluminum
(3) Health Care rose to Attractive from Unattractive. Medical Care made a leap upwards.
Zacks #2 Rank (BUY) Stock: United Health Group
(4) Materials stay at Attractive. Steel and Metals Non-ferrous are the best niches to mine here.
(5) Info Tech fell to Market Weight from Attractive. Computer-Office Equipment and Semis (with a global supply shortage) are mediocre now. Computer-Software Services and Electronics fell.
(6) Financials fell to Unattractive from Attractive. Banks & Thrifts still look good. Real Estate OK. Much higher rates ahead caused concern. Banks-Major down on recession worry. A stock correction took down Investment Funds and Investment Banking.
(7) Communications Services fell to Unattractive from Attractive. Telco Equipment fell back to a market weight industry.
(8) Consumer Discretionary fell to Unattractive from Market Weight. Auto/Tires/Trucks are strong but not hot. Lots of market weight industries in May, just like April.
(9) Utilitiesstay Unattractive. Utilities-Gas Dist. stayed the best, but only mediocre.
(10) Consumer Staples stayed Very Unattractive. The bullish exception is Agri-business (commodity prices). Poor ongoing stances for Beverages, Misc. Staples, Tobacco, and Soaps.
That’s surprisingly consistent, isn’t it?
During corrections like these, carry on with regularly-spaced, overweight, equity asset allocations. Your 401(k) will benefit from lower share prices.
The Fed and other G10 central banks (still) have share buyer’s backs.
Respectable stocks are the way to go.
Enjoy the rest of my May 2022 Zacks market strategy report.
Zacks Chief Equity Strategist and Economist
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UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
Reliance Steel & Aluminum Co. (RS): Free Stock Analysis Report
EOG Resources, Inc. (EOG): Free Stock Analysis Report
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