Positioned for the bull market
In his June 2016 “Insights” newsletter, Richard Bernstein said that his firm positioned itself for an earnings-driven bull market. He thinks that earnings will improve over the next year or so. He expects earnings to remain the key driver for stocks.
Given its view of the Market, Richard Bernstein Advisors repositioned its portfolios for an earning-driven bull run. According to its research, the US corporate universe has been in a profit recession for three or four quarters. The peak growth rate in earnings was seen about seven quarters ago. The following graph confirms this. Considering the earnings results from 1Q16 (not in the graph), the peak in earnings was seen seven quarters ago.
The firm thinks that the worst of the profit recession was in 4Q15. A deceleration in the profit cycle made it defensive.
Among equities, a defensive position means higher exposure to consumer staples (PG), utilities (PPL), healthcare (PFE), and telecom services (TMUS), compared to other sectors. There are ETFs (XLP) (XLU) (XLV) (FXH) that help you invest in these defensive sectors. Among large-cap mutual funds, a few (FDGRX) (MFEGX) have a combined one-quarter or more of their portfolios invested in these sectors.
Corporate profits may surge
The research that tells them that the trough of the corporate profit cycle was seen in 4Q15 also shows them that corporate earnings will improve consistently over the coming year or so. According to Richard Bernstein Advisors, “it is conceivable to us that S&P 500 reported GAAP profits toward the end of 2016 or early-2017 could be growing about 20%.”
In the next part, let’s look at their research closer.