Market Strategy Radar Screen Chartbook - May 2016

Where We Stand: May 2016

We look for S&P 500 earnings to grow around 8% in 2016 to $129 per share and for the benchmark to end the year at 2300, implying a P/E multiple of 17.8x expected earnings.

We look for the dollar’s strength (which has hurt US multinational competitiveness abroad and trimmed revenue and earnings growth) to moderatein 2016 as foreign developed economies extend QE and a resumption of growth trends outside the US attracts fund flows and direct investment.

As worries surrounding China’s economy lessen in part as its official response to currency and growth issues takes effect, we look for stateside and international developed markets to garner increased favorable attention from investors.

We continue to favor cyclical over defensive sectors in the near and intermediate term.

We continue to favor an alpha (active investment approach to investment) over a beta (passive index investment) approach.

We suggest investors consider a core-satellite approach that uses individual securities and actively-managed portfolios as satellites around a core of ETFs/or index funds, strategically allocated and tactically weighted, thus hedging alpha picks with beta selections.

We remain market-cap agnostic, favoring exposure distributed among large-, mid- and small-cap stocks in making stock-specific and sector-index specific allocations.

We suggest selective exposure to small- and mid-cap stocksor to their respective indices as larger companies continue to show preference for growth via acquisition over organic growth and as M&A persists as a market thematic.

Our favorite sectors to overweight versus benchmark weight remain: Consumer Discretionary and Information Technology, with our contrarian picks remaining Industrials and Materials. Health Care remains our only favorite among the defensive sectors, supported by demographics, R&D, M&A and the sector’s longer-term earnings trends.

We maintain a market weight versus the benchmark on Consumer Staples; we remain underweight Utilities, Telecoms and the Energy sector.

We expect the ECB’s deployment of QE in the EMU to ultimately prove successful in returning the region to growth. Signs of improvement continue to surface in economic data, earnings and gauges of sentiment in the region even as challenges persist.

We expect bond yields to continue a process of normalization that began in 2013, taking yields modestly higher as economic growthreasserts itself and increasingly shows sustainability.

We expect inflation to be kept in check even as the economy reflates as oil prices remain relatively low, wage growth stays restrained by globalization, algorithms, and robotics and as corporations stay focused on cost containment.

Emerging markets’ benchmark performance and outlooks remain challenged near term as a result of currency, commodity and interest rate risks, even as valuation and secular trends signal underlying opportunity amidst the asset class that has begun to be recognized in improved benchmark performances in the year.

We believe lower oil prices will ultimately prove a longer-term as well as near-term boon to energy import-dependent developed, emerging and frontier economies.

Initiatives to reduce government fuel subsidies to fund infrastructure and promote economic diversification and fiscal reform have already begun to produce positive results when deployed in some emerging economies.

In contrast, drasticallylower oil prices have led to the destabilization of governments in a number of nations dependent on energy exports, particularly the Middle East and in Africa.

The euro’s continued relative strength (particularly in light of the recent second Chinese currency devaluation and strong dollar) in our opinion speaks volumes in favor of the currency’s future. Interim rallies are likely to provide support to the currency longer term as well as drive fund flows back to Europe as investors discount further economic recovery and improved progress in the region.

For the complete report, please contact your Oppenheimer Financial Advisor.