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Hedge fund veteran cites ‘quite good’ news for the S&P 500

·Senior Writer/Chief-of-staff
·3-min read
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The S&P 500 is showing its strength amid concerns over the Omicron variant of COVID-19 casting a shadow over markets, morale, and hospitals this holiday season.

Despite the uncertainties caused by this latest chapter of the pandemic, the index’s large caps are doing much better than their smaller counterparts, hedge fund veteran Nicholas Colas pointed out on Monday in the DataTrek newsletter.

The returns since Nov. 24, when the variant first was reported to the World Health Organization, have seen quite a difference between the large-cap S&P 500 and the small-cap Russell 2000, -1.7% versus -6.8%.

The S&P 500 has still seen defensive positioning by investors crowding to health care, utilities, and consumer staples. But compared to emerging markets and small caps, it’s only caused a “modest reset in investor risk tolerance,” Colas wrote. “We don’t expect this asymmetry to change any time soon.”

Colas highlights factors like “best in class companies, economies of scale and scope, earnings leverage from inflation” as reasons to stay sanguine.

The index’s durability in the face of Omicron is only the start of the good news.

Last week Wall Street analysts revised their earnings estimates for the S&P 500 for Q4 2021 and Q1 2022, as well as their whole-year estimates, which Colas called “quite good” for two reasons.

The first is simply that analysts, despite serious uncertainty tied to the Omicron variant and supply chain disruptions, feel good enough with the state of the pandemic, markets, and economy that they are ratcheting up their earnings estimates.

“We did the sell-side analyst job all through the 1990s and can tell you current-quarter estimates only go up when the Street is as certain as they can be that actual results will be even better than the new (higher) estimate,” Colas wrote.

The second reason is that baked into this new positive analysis is a sharp level of realistic caution.

A health care worker prepares syringes with doses of Moderna's COVID-19 vaccine for booster shots at the vaccination reference center at the Epidemiology, Biostatistics and Prevention Institute (EBPI) in Zurich, Switzerland November 17, 2021. REUTERS/Arnd Wiegmann
A health care worker prepares syringes with doses of Moderna's COVID-19 vaccine for booster shots at the vaccination reference center at the Epidemiology, Biostatistics and Prevention Institute (EBPI) in Zurich, Switzerland November 17, 2021. REUTERS/Arnd Wiegmann

“Even at the new estimates for Q4 ($51.25/share) and Q1 ($52.36/share), analysts are still taking a cautious stance because Q3 came in much higher ($53.86/share actual),” Colas said. “Yes, Financials will certainly see lower earnings in Q4 than Q3, but U.S. economic growth remains robust so we see little reason for Q4 earnings to not at least match Q3’s results.”

One of Colas’s observations throughout the year is how earnings have consistently surprised to the upside, which has helped push the S&P 500 forward this year and “held the market together during periods of pandemic-related uncertainty.” This isn’t over yet.

“This week’s upward revisions should have the same ability to backstop equities as we wrap up the year,” he wrote. “The operative word is ‘should’, of course, and we do expect further volatility this week.”

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Ethan Wolff-Mann is a Senior Writer and Chief of Staff at Yahoo Finance. When he is reporting, he focuses on investing, consumer issues, and personal finance. Follow him on Twitter @ewolffmann.

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