S&P Capital IQ’s Investment Policy Committee has boosted its 12-month price target on the S&P 500 (^GSPC) to 1,895 from 1,845, implying 7% upside from the Nov. 6 close.
“Our asset allocation remains unchanged, with a recommended overweighting of equities, and a cyclical sector bias. Positive factors include seasonals, low interest rates, falling gasoline prices, and widening S&P 500 profit margins, as Q3 EPS growth again is outpacing revenue gains,” said S&P Capital IQ in a new research note.
S&P Capital IQ’s cyclical bias is not surprising, particularly given the tendency of cyclical sectors to outperform in the fourth quarter.
“Rotating into the Consumer Discretionary, Industrials and Materials sectors from November through April, rather than back into the market, beat the S&P 500 by 640 basis points per year, and resulted in an even lower standard deviation of 13.7,” said S&P Capital IQ’s Sam Stovall late last month. [ETFs for Buy in November]
Discretionary, financial services and industrials are the three sectors S&P Capital IQ has overweight ratings on while the firm has underweight ratings on materials, telecom and utilities.
“According to Capital IQ 423 companies in the S&P 500 have posted Q3 operating EPS, showing a 5.3% year-over-year rise. The beat rate now stands at an above-average pace of nearly 68%, as 286 companies exceeded Street estimates, while 95 missed and 42 matched. Revenues are now projected to advance 4% in Q3. Guidance for Q4 2013 has been provided by 80 companies. Of those, 63 are negative, 10 are positive and 7 are in line.
This produces a negative-to-positive ratio of 6.3, which is higher than the 15-year average. Revenues are seen rising 3.0%. With about 85% of the S&P 500 having reported Q3 results, EPS beats/misses will now likely become potential company specific catalysts, rather than market-moving surprises,” said S&P Capital IQ in the note.
Since the start of October, the Industrial Select Sector SPDR (NYSEArca: XLI) is up 5.1% while the Materials Select SDPR (NYSEArca: XLB) is higher by 3.5%.
That does not mean investors have abandoned defensive sectors. The Consumer Staples Select Sector SPDR (NYSEArca: XLP) is the best performer among the nine sector SDPR ETFs since the start of October with a gain of 6.5%.
GICS Sector Performances & Advised Weightings
Chart Courtesy: S&P Capital IQ. Click to enlarge.