The U.S. economy remains challenged, but there are some encouraging signs, according to John Hancock Investment Management’s Q3 Market Intelligence Outlook, released Thursday.
“Leading economic indicators remain depressed but appear to be bottoming,” the firm said in the report.
Citing The Conference Board’s composite index of leading indicators as of May 31, John Hancock said: “Despite the sharp downturn in leading indicators in March and April, encouraging signs began to appear in May, with the majority of indicators turning up from very low levels.”
The index rose 2.8% in May, the most recent month for which data is available, following a 6.1% decline in April and a 7.5% decline in March.
Earnings Season Surprises in Store
The “earnings downturn isn’t uniform across sectors,” the report said, pointing to utilities and information technology stocks as the only two sectors expected to see year-over-year earnings per share growth for 2020, of 1.82% and 1.52%, respectively. Every other type of stock is expected to decline anywhere from 1.18% (health care) to a whopping 105.62% (energy). However, the firm is estimating each sector to see EPS growth in 2021.
“Earnings season may be full of surprises,” according to Matthew Miskin, co-chief investment strategist at John Hancock Investment Management and one of the report’s authors. “Lack of corporate guidance and clarity on the quarter makes analyst estimates of a 45% decline in S&P 500 Q2 earnings a best guess,” he told ThinkAdvisor on Friday.
Investors’ Best Opportunities
“Mid-cap stocks offer an attractive post-recession opportunity,” the report said, adding: “After the largest underperformance vs. the S&P 500 Index since 1998, U.S. mid-caps may bounce back coming out of this recessionary period.”
U.S. mid-caps “benefit from increased fiscal stimulus and have shown the ability to bounce back out of recessions,” according to John Hancock. “Since the market low in March, mid-cap stocks have been among the best performers across the cap spectrum,” it noted in the report.
Investment-grade corporate bonds, meanwhile, “offer an attractive risk/reward profile,” it said, adding: “Support from the Fed’s current bond-buying programs provides an additional tailwind.”
In fixed income, “emphasizing quality investment-grade corporate and government bonds may outpace lower-rated issues,” John Hancock said, noting it has a 12-18 month view of “neutral” for fixed income. “Returns on short duration fixed-income strategies are likely to remain low,” it predicted.