by Scott Martindale
  CEO, Sabrient Systems LLC
 

Quick note 1: Sabrient’s quarterly Dividend 58 portfolio launched today 11/2 with a diverse mix of 41 stocks across sectors and market caps. It employs a Growth & Income strategy with bond-like yield (current yield upon launch of 3.33%) while seeking capital appreciation from high-quality companies. Also, our Q3 2026 Baker’s Dozen portfolio (13 top growth picks) launched on 10/20. Our Q3 2025 Baker’s Dozen just terminated on 10/20 with a gross total return of +33% vs. +24% for SPY. And our quarterly Small Cap Growth 52 portfolio launched on 9/15, with a mix of 44 small-cap stocks. It followed the launch of Sabrient’s annual Forward Looking Value 14 portfolio on 8/26, having a diverse mix of 31 stocks. Last year’s FLV 13 terminates on 11/17 and is currently up +42% vs. +21% for S&P 500 Value (SPYV) and +19 for S&P 500 (SPY) as of 10/30.

Quick note 2: I was recently a guest on the “Biz Wiz” podcast to tell my humble career story from engineering school to the oil industry to investment research and eventually CEO of Sabrient Systems. Key takeaway from the 30-minute discussion is that an entrepreneurial mindset means adaptability, resilience, focusing on high-potential projects, avoiding rabbit holes, responding to customer needs, creating and scaling value, and advocating for yourself and your ideas. I’d love to hear your impressions!

Overview:

Well, in case you thought you largely missed out on the AI trade, the market has given you another entry point. Sure, the sharp Technology selloff was amplified by technical selling, profit-taking, stop-loss orders, and leveraged algo traders temporarily switching to shorts. But I suspect investor anxiety about the approaching midterm elections also played a role. A potential “blue wave” raises the prospect of renewed efforts to roll back the OBBBA's tax reforms, deregulation, and shrinkage of government, along with greater regulatory scrutiny and possible restrictions on AI development and the construction of datacenters, natural gas pipelines, and nuclear facilities.

Such policies could impede the massive infrastructure buildout underpinning the investment boom, which has become a major driver of corporate capex, earnings growth, and broader economic activity. Combined with growing investor scrutiny of hyperscaler spending and ROI, the prospect of stiff political obstacles to this transformative secular technology and economic cycle may be adding another layer of uncertainty to a market already concerned about whether the massive “all-in” capital spending on the various acronyms AI/SI/ASI/RSI will generate adequate returns to justify it all. Some commentators estimate that it will take $1 trillion in revenue run-rate by end of 2028 to justify the capital commitments, which leaves little room for a slowdown.

Nevertheless, assuming the October selloff was driven more by technicals and macro worries rather than earnings growth, and assuming the president’s veto power can stave off the wolves if the blue wave happens, optimistic investors now enjoy much better equity valuations, not just on the broad market but on many of the technology leaders and cutting-edge innovators. Moreover, the rapid surge in risk-free rates—that have been squeezing valuations by raising both corporate borrowing costs and the discount rate applied to future cash flows—seems to have weathered a “blowoff top” and cycle peak, as I suggested was underway in my 10/6 post. Regardless, most of the leading corporations seem to be tolerating higher interest rates pretty well.

As a reminder, corporate revenue tends to track nominal GDP growth. So, with real US GDP coming in at 3.4% annualized pace for Q3 2026 and the Atlanta Fed GDPNow model estimating Q4 at 3.7% (as of 11/2), it means nominal GDP growth (including the GDP deflator for Q3 of 2.2%) is 5.6-5.9%, supporting strong revenue growth, which is well above today’s 4.9% 10-year yield. This suggests that economic output and tax revenues are expanding faster than long-term borrowing costs, making debt easier to service while keeping financial conditions stimulative.

I hear the argument that rates are merely normalizing back to pre-GFC/ZIRP levels and that this 0.7% growth-to-yield spread in a highly resilient economy will keep upward pressure on interest rates. But this isn’t your father’s economy, and it certainly doesn’t mean today’s economy can readily absorb a “mean reversion” in interest rates. Today’s hyper-financialized, post-GFC/ZIRP global economy had become so accustomed to assuming lots of debt because rates were so low, which means that rising rates could cripple the many vulnerable debt-addicted businesses, governments (including our own massive federal debt), and a housing market (which is critical for a healthy consumer) stubbornly priced for low mortgage rates and low inventory. And most of this debt is either floating-rate or must keep rolling over through refinance.

In addition, 30-year mortgage rates (reaching as high as 7.4% recently) certainly have been even higher in the past. But home prices today are largely based on that lower baseline of post-GFC easing and ultra-low rates. And given recent strengthening of the US dollar, some emerging market economies with dollar-denominated debt may be forced into default.

In other words, outside of the largest corporations with fortress balance sheets, today’s highly indebted global financial system simply can’t handle the current level of interest rates.

Economist and liquidity expert Michael Howell of CrossBorder Capital sees cracks in the veneer of economic strength. He says that while capital markets were traditionally intended to raise new capital for real-world investments, infrastructure, and projects, today the reality is that 70-80% of all global financial transactions are simply rolling over existing debt, effectively turning the global financial system into a massive "refinancing machine."

Furthermore, I do not buy the “persistently elevated inflation” narrative. I believe underlying core inflation is stable and structural disinflationary trends are poised to take control once the energy/supply shocks are resolved. Indeed, I continue to assert that Fed rate hikes are a policy mistake for our bifurcated K-shaped economy (although it is notable that M2 money supply continues to grow at the same decent clip since 2024). We have soaring corporate profits and stock prices juxtaposed with stagnant labor and housing markets, negative real wage growth, a falling personal saving rate, and surging bond credit spreads.

In my comprehensive commentary below, I discuss:

 1. The booming IPO market
 2. Earnings and valuations
 3. Stock valuations and bond yields
 4. Jitters over the AI trade
 5. Surging credit spreads
 6. GDP, industrial production, and productivity
 7. Inflation and the K-shaped economy
 8. What should the Fed take from this?
 9. China’s economy is a growing problem for the world
10. My Final Comments section on the oath of office, crisis in France, and AI fearmongering
11. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

The combination of high bond yields, surging credit spreads, geopolitical risks, elevated oil prices, ongoing supply shocks, election uncertainty, and jitters about both AI safety and when significant ROI will arrive for the massive AI capex are conspiring to hurt investor confidence and drive down valuation multiples more than recent S&P price action reflects, as overall earnings and guidance continue to march higher. Indeed, a market correction has been underway for months, even though the broad cap-weighted market indexes hasn’t reflected it. While a relatively small group of large stocks kept the S&P 500 near its highs, valuations across much of the market have been declining for months as investors are increasingly rewarding companies with stronger profitability, healthier balance sheets and more dependable earnings while assigning lower valuations to businesses whose prospects are less certain.

The aggregate P/E multiple is down over 20% from its high, and EPS growth is expected to slow substantially next year, albeit from an incredibly (and unsustainably) high level. And credit markets are getting more selective, forcing a quality rotation that includes equities—an internal rotation rather than an abandonment of stocks. So, when I talk about greater market breadth being “healthy” for the market, I’m not talking about equal-weight outperforming cap-weight for an extended period. No, after such periodic periods of cleansing the leverage and speculation, we still need Technology sector leadership, including from Big Tech. But having broader participation across the stock market with more (if not all) “boats” lifted is healthy and desirable for the stock market for many of the same reasons that having broader participation from the lower leg of the K-shaped economy is healthy and desirable for the economy and society.

However, the Fed knows that credit spreads have surged as investors seek either higher quality or greater compensation for elevated risk. But only CCC or worse are in distressed territory. This is yet another sign of the neglected lower-leg of the K-shaped economy being left behind in this AI infrastructure-driven economy, and why I urge the Fed not to hike rates any further—and in fact should cut back toward a 3.0-3.25% fed funds rate (FFR). Look, I understand the argument that today’s rates are simply normalizing to pre-GFC levels. And I am not talking about a return to ZIRP (zero interest rate policy), which created essentially “free money” leading to plenty of malinvestment in unworthy, highly speculative companies, products, and ventures—including non-fungible tokens (NFTs) and special purpose acquisition companies (SPACs).

I just want to see a more broad-based economy (i.e., more boats lifted) in which most if not all industries are participating. Keeping floating-rate debt manageable is a step in that direction. So, I’m thinking that a funds rate of 3.25% at the top end plus an historical average spread of 125 bps for the 10-year Treasury should put 10-year at about 4.5%. This suggests nominal GDP growth (with today’s growth-to-yield spread of 0.7%) of around 5.0-5.2%. With the GDP deflator falling to 2.0%, we would have sustainable real GDP growth at a solid 3.0%.

Overall, I see the US economy as more recession-resistant, more technology-efficient, more services-oriented (meaning less energy-intensive and less at risk of inventory buildup that must be dumped cheaply into the market, like China does), and thus less cyclical. So, a steadier, more predictable economy means structurally higher corporate margins, earnings, cash flow, and capex consistency, which supports higher valuation multiples, lower credit spreads, a subdued VIX, and a buy-the-dip investor mentality. It seems that only a resurgence in bond yields, an AI-related credit crisis, or a harsh political disruption could derail it.

As such, I still think the S&P 500 has a shot at hitting 8,000 by year-end. But it largely depends on the ongoing Q3 earnings reports and forward guidance, which have illuminated some concerns among juggernauts—including Meta (META), Alphabet (GOOGL), and Amazon (AMZN) all spending well beyond their monstrous cash generation on their AI buildouts and pushing each company into deep, historically unprecedented negative free cash flow. Expectations are becoming challenging. As the GMO Asset Allocation team observed, “For the first time in twenty years, with the brief exception of the Global Financial Crisis, we are seeing net dilution in the U.S. stock market (i.e., share issuance exceeding share buybacks) as the hyperscalers continue their capital expenditure spree.”

Moreover, I expect a continuation of the market broadening beyond just the AI trade, and I continue to see opportunities in active stock selection, equal-weight indexes, value stocks, cyclical sectors, small caps, and bond-alternative dividend payers. Indeed, Sabrient’s quant-based, actively selected (“quantamental”), equal-weight Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios have been largely outperforming their benchmarks—several by substantial margins. And as a reminder, our Earnings Quality Rank (EQR) is licensed as a quality prescreen to the actively managed, low-beta First Trust Long-Short ETF (FTLS), which now holds more than $2.6 billion in AUM.

Lastly, with a highly consequential election upon us, I hope you vote for policies over personalities, and long-term success and prosperity over short-term band-aids. There are those among us who are blissfully ignorant of and unburdened by our ancestors’ centuries of accumulated wisdom, trial and error, what works and what doesn’t, who think they know better how to maximize the potential and wellbeing of both individuals and society as a whole despite the harsh lessons of history and despite many candidates never having managed a successful enterprise themselves, much less a nation. Worse, many voters simply go for “the other guy” if they aren’t happy with their lives today, no matter how impractical the other guy’s proposed solutions. I have more to say about this in my Final Comments section below.

Here is a link to this full post in printable PDF format. As always, I’d love to hear from you! Please feel free to email me your thoughts on this article or if you’d like me to speak on any of these topics at your event.  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

By some measures, the month of November was the best month for global stock markets in over 20 years, and the rally has carried on into December. Here in the US, the S&P 500 (SPY) gained +12.2% since the end of October through Friday’s close, while the SPDR S&P 400 MidCap (MDY) rose +18.1% and the SPDR S&P 600 SmallCap (SLY) +24.3%. In fact, November was the biggest month ever for small caps. Notably, the Dow broke through the magic 30,000 level with conviction and is now testing it as support. But more importantly in my view, we have seen a significant and sustained risk-on market rotation in what some have termed the “reopening trade,” led by small caps, the value factor, and cyclical sectors. Moreover, equal-weight indexes have outperformed over the same timeframe (10/30/20-12/11/20), illustrating improving market breadth. For example, the Invesco S&P 500 Equal Weight (RSP) was up +16.9% and the Invesco S&P 600 SmallCap Equal Weight (EWSC) an impressive +29.5%.

As the populace says good riddance to 2020, it is evident that emergency approval of COVID-19 vaccines (which were developed incredibly fast through Operation Warp Speed) and an end to a rancorous election cycle that seems to have resulted in a divided federal government (i.e., gridlocked, which markets historically seem to like) has goosed optimism about the economy and reignited “animal spirits” – as has President-elect Biden’s plan to nominate the ultra-dovish former Federal Reserve Chairperson Janet Yellen for Treasury Secretary. Interestingly, according to the WSJ, the combination of a Democratic president, Republican Senate, and Democratic House has not occurred since 1886 (we will know if it sticks after the Georgia runoff). Nevertheless, if anyone thinks our government might soon come to its collective senses regarding the short-term benefits but long-term damage of ZIRP, QE, and Modern Monetary Theory, they should think again. The only glitch right now is the impasse in Congress about the details inside the next stimulus package. And there is one more significant boost that investors expect from Biden, and that is a reduction in the tariffs and trade conflict with China that wreaked so much havoc on investor sentiment towards small caps, value, and cyclicals. I talk more about that below.

Going forward, absent another exogenous shock, I think the reopening trade is sustainable and the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership broadens, which is good for the long-term health of the market. The reined-in economy with its pent-up demand is ready to bust the gates, bolstered by virtually unlimited global liquidity and massive pro-cyclical fiscal and monetary stimulus here at home (with no end in sight), as well as low interest rates (aided by the Fed’s de facto yield curve control), low tax rates, rising inflation (but likely below central bank targets), and the innovation, disruption, and productivity gains of rapidly advancing technologies. And although the major cap-weighted indexes (led by mega-cap Tech names) have already largely priced this in, there is reason to believe that earnings estimates are on the low side for 2021 and stocks have more room to run to the upside. Moreover, I expect active selection, strategic beta ETFs, and equal weighting will outperform.

On that note, Sabrient has been pitching to some prominent ETF issuers a variety of rules-based, strategic-beta indexes based on various combinations of our seven core quantitative models, along with compelling backtest simulations. If you would like more information, please feel free to send me an email.

As a reminder, we enhanced our growth-at-a-reasonable-price (aka GARP) quantitative model just about 12 months ago (starting with the December 2019 Baker’s Dozen), and so our newer Baker’s Dozen portfolios reflect better balance between secular and cyclical growth and across large/mid/small market caps, with markedly improved performance relative to the benchmark S&P 500, even with this year’s continued market bifurcation between Growth/Value factors and Large/Small caps. But at the same time, they are also positioned for increased market breadth as well as an ongoing rotation to value, cyclicals, and small caps. So, in my humble opinion, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast quant rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. To summarize, our outlook is bullish (although not without bouts of volatility), the sector rankings reflect a moderately bullish bias (as the corporate outlook is gaining visibility), the technical picture looks solid, and our sector rotation model is in a bullish posture. In other words, we believe “the stars are aligned” for additional upside in the US stock market – as well as in emerging markets and alternatives (including hard assets, gold, and cryptocurrencies).

As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest Baker’s Dozen presentation slide deck and commentary on terminating portfolios. Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Well, the election is finally upon us, and most folks on either side of the aisle seem to think that the stakes couldn’t be higher. That might be true. But for the stock market, I think removing the uncertainty will send stocks higher in a “relief rally” no matter who wins, as additional COVID stimulus, an infrastructure spending bill, and better corporate planning visibility are just a few of the slam-dunk catalysts. Either way, Modern Monetary Theory (MMT) is here, as both sides seem to agree that the only way to prevent a COVID-induced depression in a highly indebted economy is to print even more money and become even more leveraged and indebted. Now investors can only anxiously pray for a clean, uncontested election, followed soon by a reopening of schools and businesses. Stocks surely would soar.

Of course, certain industries might be favored over others depending upon the party in power, but in general I expect greater market breadth and higher prices into year-end and into the New Year. However, last week, given the absence of a COVID vaccine and additional fiscal stimulus plus the resurgence of COVID-19 in the US and Europe, not to mention worries of a contested election that ends up in the courts, stocks fell as investors took chips off the table and raised cash to ride out the volatility and prepare for the next buying opportunity. The CBOE Volatility Index (VIX) even spiked above 41 last week and closed Friday at 38, which is in panic territory (although far below the all-time high of 85.47 in March).

Nevertheless, even as the market indices fell (primarily due to profit-taking among the bigger growth names that had run so high), many of the neglected value stocks have held up pretty well. And lest you forget, global liquidity is abundant and continuing to rise (no matter who wins the election) – and searching for higher returns than ultra-low (or even negative) government and sovereign debt obligations are yielding.

All in all, this year has been a bit deceiving. While the growth-oriented, cap-weighted indexes have been in a strong bull market thanks to a handful of mega-cap Tech names, the broader market essentially has been in a downtrend since mid-2018, making it very difficult for any valuation-oriented portfolio or equal-weight index to keep up. However, since mid-July (and especially since the September lows) we have seen signs of a nascent rotation into value/cyclicals/small caps, which is a bullish sign of a healthy market. Institutional buyers are back, and they are buying the higher-quality stocks, encouraged by solid Q3 earnings reports.

Going forward, our expectation is that the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership will broaden such that strategic beta ETFs, active selection, and equal weighting will thrive once again. This should be favorable for value, quality, and growth at a reasonable price (GARP) strategies like Sabrient’s, although not to the exclusion of the unstoppable secular growth industries. In other words, investors should be positioned for both cyclical and secular growth.

Notably, Sabrient has enhanced its GARP strategy by adding our new Growth Quality Rank (GQR), which rewards companies with more consistent and reliable earnings growth, putting secular-growth stocks on more competitive footing in the rankings with cyclical growth (even though their forward valuations are often higher than our GARP model previously rewarded). As a result, our newer Baker’s Dozen portfolios launched since December 2019 reflect better balance between secular growth and cyclical/value stocks and across large/mid/small market caps. And those portfolios have shown markedly improved performance relative to the benchmark, even with this year’s continued bifurcation. Names like Adobe (ADBE), Autodesk (ADSK), Digital Turbine (APPS), Amazon (AMZN), Charter Communications (CHTR), NVIDIA (NVDA), and SolarEdge Technologies (SEDG) became eligible with the addition of GQR, and they have been top performers. But at the same time, our portfolios are also well-positioned for a broadening or rotation to value, cyclicals, and small caps. In addition, our three Small Cap Growth portfolios that have launched during 2020 using the same enhanced selection process are all nicely outperforming their benchmark. So, IMHO, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, I expect stocks to move higher once the election results are finalized – but with plenty of volatility along the way until the economy is fully unleashed from its COVID shackles. In addition, our sector rankings reflect a moderately bullish bias (as the corporate outlook is starting to clear up), the technical picture looks ready for at least a modest bullish bounce from last week’s profit-taking, and our sector rotation model retains its neutral posture. As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest Baker’s Dozen slide deck and commentary on terminating portfolios. Read on....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The April-August 5-month stretch was the best 5-month period for the S&P 500 (+35%) since 1938. The index was +6.3% higher than its pre-COVID high on 2/19/20 and +56.2% higher than its COVID selloff low on 3/23/20. But any market technician would tell you that the further the market rises without a pause, the more severe the inevitable pullback. And indeed, along came the traditionally challenging month of September and a nasty bout of profit-taking mixed with capital preservation – and exacerbated by the standoff on new fiscal stimulus, an uptick in COVID cases hindering global economic reopening, and the potential for a SCOTUS nomination firestorm. Many of the investor darlings from among the disruptive, secular-growth Technology companies that had been surging so strongly have suddenly fallen hard, with the S&P 500 (SPY) pulling back -10.3% from its 9/2/20 intraday high to its 9/21/20 intraday low and the tech-laden Nasdaq 100 (QQQ) falling -14.3%.

After giving back all of August’s strong gains, perhaps Monday was the capitulation day from which the market can recover anew. Q3 earnings reporting season starts in a couple of weeks, so it will be important to get a read on the trajectory of earnings recovery and forward guidance.

I have written often about the stark market bifurcation that has developed over the past few years, beginning with the unwinding of the “Trump Bump” reflation trade in light of the emerging trade wars. It led to historic extremes in Growth over Value and Large over Small caps, with the broad-market, cap-weighted indexes hitting new highs as investment capital has favored mega-cap, secular-growth Tech and passive, market-cap-weighted ETFs. But today, although I think it is unlikely that investors are giving up on Technology names, their high relative valuations as the economy enters what I see as an early-stage expansionary cycle appear to be opening the door for greater market breadth and some capital rotation into value, cyclicals, and smaller caps.

My expectation is that, as the historic imbalances in Value/Growth and Small/Large performance ratios gradually revert and market leadership broadens, strategic beta ETFs, active selection, and equal weighting should thrive once again. This should be favorable for value, growth-at-a-reasonable-price (GARP), and quality-oriented strategies like Sabrient’s, although not to the exclusion of secular growth industries. In other words, an investor should be positioned for both cyclical and secular growth.

This is why, rather than continuing to wait around for the value/growth performance gap to converge, we chose to introduce new enhancements to our GARP stock selection process to better balance value-oriented cyclical growers with consistent secular growers while also reducing relative volatility versus the benchmark. Moreover, we have leveraged our full suite of 7 core quantitative models to create 11 new strategic-beta, passive indexes. You will be hearing more about these in the near future.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while I still have a favorable long-term view on stocks, there will be plenty of volatility ahead. In addition, our sector rankings have a moderately defensive bias (given that the near-term outlook in our fundamentals-based model is muddled and the Outlook scores are tightly bunched), the technical picture looks might be setting up for a bullish reversal, and our sector rotation model sits in a neutral posture. As a reminder, you can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials.

Read on....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Quick assessment:  We have an historic pandemic wreaking havoc upon the global economy, with many US states reversing their reopenings. We just got the worst ever quarterly GDP growth number, and jobless claims are resurging. The Federal Reserve is frantically printing money at breakneck pace to keep our government solvent, with M3 money supply growth having gone parabolic. We have a highly contentious presidential election that many consider to be the most consequential of our lifetimes. There is unyielding and unappeasable social unrest, with nightly rioting in the streets in many of our major cities. Tensions with China are again on the rise, with a new Cold War seemingly at hand. Hurricanes are threatening severe damage in states that are already reeling from a surge in COVID hospitalizations. And yet the Nasdaq 100 (QQQ) has burst out to new highs while the S&P 500 (SPY) is within 3% of its all-time high (although, quite notably, both of these cap-weighted indexes are dominated by a handful of mega-cap, disruptive juggernauts).

Of course, stocks have been bolstered by unprecedented congressional fiscal programs and Fed monetary support, including zero interest rate policy (ZIRP), open-ended quantitative easing (QE), de facto yield curve control (YCC), and the buying of corporate bonds (including junk bonds and fixed-income ETFs – and perhaps will include equity ETFs at some point). This de facto “Fed put” has induced a speculative fervor, FOMO (“fear of missing out”), and a TINA (“There is No Alternative!”) mindset for risk assets – particularly given infinitesimal bond yields and a falling dollar. Furthermore, while COVID cases have risen with the economy’s attempt at reopening, the death rate is down 75% since its peak in April, as the people being infected this time around are generally younger and less vulnerable and hospitals are better prepared.

However, we have witnessed extreme bifurcation in this market, with certain secular growth segments performing extremely well and hitting new all-time highs, while other segments are quite literally in a depression. And although the pandemic has exacerbated this situation, it has been developing for a while. As I have often discussed, when the trade war with China escalated in mid-2018, the market became highly bifurcated to seek the perceived safety of the dominant mega caps over smaller caps, growth over value, and secular growth Technology over the neglected cyclical growth sectors like Financials, Industrials, Materials, and Energy. It rotated defensive and risk-off even given the positive economic outlook. This is also when the price of gold began to ascend. Yes, gold has become much more than just a hedge; it now has its own secular growth story (as discussed below), which is why Sabrient’s new Baker’s Dozen for Q3 2020 includes a gold miner.

So, while Sabrient’s flagship Baker’s Dozen portfolios over the past two years have been dominated by smaller caps, the value factor, and cyclical sectors – to their detriment in this highly bifurcated market – you can see that our newer portfolios since the enhancements were implemented have been much more balanced among large, mid, and small caps, with a slight growth bias over value, and a balance between secular growth and cyclical growth companies.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model remains bullish.

As a reminder, Sabrient has introduced process enhancements to our forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth companies (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials. To read on, click here....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Stocks continued their bullish charge from the pandemic selloff low on 3/23/20 into early-June, finally stumbling over the past several days due to a combination of overbought technicals, a jump in COVID cases as the economy tries to reopen, and the Fed giving grim commentary on the pace of recovery. But then of course Fed chair Jerome Powell (aka Superman) swooped in this week to save the day, this time to shore up credit markets with additional liquidity by expanding bond purchases into individual corporate bonds rather than just through bond ETFs. But despite unprecedented monetary and fiscal policies, there are many prominent commentators who consider this record-setting recovery rally to be an unwarranted and unsustainable “blow-off top” to a liquidity-driven speculative bubble that is destined for another harsh selloff. They think stocks are pricing in a better economy in the near-term than we enjoyed before the pandemic hit, when instead normalization is likely years away.

Certainly, the daily news and current fundamentals suggest that investors should stay defensive. But stocks always price a future vision 6-12 months in advance, and investors are betting on better times ahead. Momentum, technicals, fear of missing out (FOMO), and timely actions from our Federal Reserve have engendered a broad-based bullish foundation to this market that appears much healthier than anything displayed over the past five years, which was marked by cautious sentiment due to populist upheaval, political polarization, Brexit, trade wars, an attempt to “normalize” interest rates following several years of zero interest-rate policy (ZIRP), and the narrow leadership of the five famed mega-cap “FAAAM” Tech stocks – namely Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB).

Equal-weight indexes solidly outperformed the cap-weighted versions during the recovery rally from the selloff low on 3/23/20 through the peak on 6/8/20. For example, while the S&P 500 cap-weighted index returned an impressive +45%, the equal weight version returned +58%. Likewise, expanded market breadth is good for Sabrient, as our Baker’s Dozen portfolios ranged from +62% to +83% (and an average of +74%) during that same timeframe, led by the neglected small-mid caps and cyclical sectors. Our Forward Looking Value, Small Cap Growth, and Dividend portfolios also substantially outperformed – and all of them employ versions of our growth at a reasonable price (GARP) selection approach.

Although the past week since 6/8/20 has seen a pullback and technical consolidation, there remains a strong bid under this market, which some attribute to a surge in speculative fervor among retail investors. There is also persistently elevated volatility, as the CBOE Volatility Index (VIX) has remained solidly above the 20 fear threshold since 2/24/20, and in fact has spent most of its time in the 30s and 40s (or higher) even during the exuberant recovery rally. And until earnings normalize, the market is likely to remain both speculative and volatile.

Regardless, so long as there is strong market breadth and not sole dependence on the FAAAM stocks (as we witnessed for much of the past five years), the rally can continue. There are just too many forces supporting capital flow into equities for the bears to overcome. I have been predicting that the elevated forward P/E on the S&P 500 might be in store for further expansion (to perhaps 23-25x) before earnings begin to catch up, as investors position for a post-lockdown recovery. Indeed, the forward P/E hit 22.5x on 6/8/20. But I’d like to offer an addendum to this to say that the forward P/E may stay above 20x even when earnings normalize, so long as the economy stays in growth mode – as I expect it will for the next few years or longer as we embark upon a new post-recession expansionary phase. In fact, I believe that rising valuation multiples today, and the notion that the market actually has become undervalued, are a direct result of: 1) massive global liquidity, 2) ultra-low interest rates, and 3) the ever-growing dominance of secular-growth Technology on both our work processes and the broad-market indexes – all conspiring to create a TINA (“There is No Alternative”) climate for US equities.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model moved to a bullish posture in late May.

As a reminder, Sabrient has enhanced its forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth firms (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials.  Read on....