How to Position Your Portfolio for Brexit Fallout
After a dismal June dominated by Brexit worries, July has offered a flourish of favorable economic and earnings announcements. Eric Wiegand, senior portfolio manager at the private client reserve at U.S. Bank (USB) - Get Report , said investors should enjoy the good times, but be prepared for some market storms ahead.
"We are about 20% through earnings season at this point, but we've seen results be less bad," said Wiegand. "They are exceeding an easy hurdle and if that maintains we could certainly see the markets advance from here, but it will be somewhat challenged. We really do think this is going to be a very choppy and volatile environment."
He said his current 2016 price target for the S&P 500, now trading around 2,170, is 2,100, within a range between 1,900 and 2,200.
Wiegand said his underlying premise has been, and continues to be, that an improving economy, both at home and abroad, is required to drive earnings, which are ultimately required to support higher stock prices. The decision for the UK to leave the EU is potentially an overhang to global growth and possibly to earnings of multinational companies, in his opinion. As such, potentially lower earnings and some price multiple compression implies overall muted returns.
Wiegand said sectors such as technology, consumer discretionary and healthcare appear attractive based on favorable relative valuations, attractive growth prospects and their thematic appeal.
As for the banks, which have been beating Wall Street estimates thus far in earnings season, Wiegand says they are operating under a "less-bad scenario".
"There was great fear and apprehension coming into earnings season because of the depressed interest rate environment and concerns over credit quality," said Wiegand. "But consumer credit has continued to expand. Deposits have grown. So it's a more fertile environment for them. But in order to do better we really need a more constructive interest rate environment."