Here are the notes from Standard & Poor's Investment Policy Committee meeting, held on Wednesdays.
The trend in first-quarter operating EPS projections is lower for eight of the 10 sectors in the S&P 500, which in our view is possibly due to higher rates and oil prices and more modest consumer spending. The two sectors bucking this trend are utilities and financials.
S&P's Equity Strategy raised its recommendation on the materials sector to marketweight from underweight, due to solid price momentum, strong global GDP growth estimates and favorable technicals.
We reduced the suggested exposure to the utilities sector to underweight from marketweight, citing lofty valuations, eroding technicals and higher rates, which may offer increased yield competition.
We think caution is warranted near term. The S&P 500 fell back to intermediate-term support on Tuesday, and so far, the index has held. However, the S&P 500 did break trendline support off the lows in October and March, as well as chart support in the 1295 area.
Crude oil has run almost to the $70 level once again, hitting an intraday high of $69.60. If crude oil can break through the $70 level, we believe prices will head up to the $75-$80 area.
The 10-year Treasury bond yield hit 4.98% on Wednesday, its highest level since June 12, 2002. We are still looking for a small pullback prior to breaking 5%. Yet if yields break above the 5% level, it would reverse a very long-term bull market for bonds, in our view, and we think rates could then climb up to the 5.5%-6% area within 12 months of the breakout.
In our opinion, last week's economic data indicated that the economy is moderating after its winter surge but is continuing to grow at a solid pace. The strong employment report showed that the labor market is very healthy, with the unemployment rate now back to its 5-year low of 4.7%, after two consecutive months of job gains above 200,000.
The weak chain-store reports are troubling to us, however, as are the continued drops in manufacturing employment and in the recent purchasing managers' survey. The data still suggest at least one more rate hike from the Fed, in our opinion.