Erin Gibbs, Equity Chief Investment Officer, S&P Global Market Intelligence

FOCUS: U.S. Equities

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MARKET OUTLOOK:

The S&P 500 is still trading very rich at 18X forward earnings. It’s still the best option in a large cap equity space considering global alternatives but we warn investors of limited upside and vulnerability to exogenous shocks. Currently the S&P 500 expect 5 per cent growth for the next 12 months, which is on the low side historically. Again, energy is the drag on earnings. Excluding the energy sector, the S&P 500 expects about 7.5 per cent earnings growth. Better but not stellar. As long as we have the Fed supporting low interest rates and cheap lending we could see valuations remain high. So we don’t see this as an exit point yet. Just be wary that the lack of volatility we have seen in the U.S. markets recently is not what we expect for the remainder of the year.

The Homebuilding industry is an area that even after the run up still looks good to me. One ETF I like is XHB: SPDR Series Trust - SPDR S&P Homebuilders ETF. The Fed’s easing policy seems to be working, not only when looking at employment reports but also at new home sales. The average upside for the ETF according to Wall St. analysts is 9.5 per cent from where the stocks are trading now. Fundamentally the ETF looks reasonably priced. The average P/E is only 16X forward earnings, compared to 18X for the S&P 500. It has an expected forward EPS growth of 26 per cent compared to 5 per cent for the S&P 500. So you are getting cheaper, higher growth. The ETF is comprised of traditional homebuilders like Toll Brothers and Pulte Group, but also a large weighting toward consumer discretionary specialty retail like Williams-Sonoma and Home Depot. So it is not just exposed to industrial building, but also the U.S. home consumer. So we see this as not just an interest rate play, but also linked to the strength of the U.S. consumer and willingness to spend. Given the recent trends on both areas we’ve seen, we see these companies well positioned for the next quarter.

Top Investing Ideas:

Sprouts Farmers Market (SFM.O)

This is a mid-cap stock consumer staple so there is some growth. Mid-caps have outpaced largely year-to-date. Sprouts Farmer Market is well-positioned to benefit from its exposure to the fast-growing natural and organic food industry, as it plans significant new store expansions including 36 stores this year. SFM differentiates itself by offering low-priced, high-quality produce (approximately 25 per cent of total sales) in a convenient, small square-footage format versus many of its competitors. We see net sales rising 14 per cent in 52-week 2016 to $4.081 billion, up from $3.593 billion reported in 53-week 2015, reflecting an 4.0 per cent increase in comparable store sales and a 16 per cent rise in store count (36 net new stores). We see comparable store sales benefiting from increased traffic and higher basket sizes due to a more aggressive pricing strategy and increased new store brand awareness.

Apple (APPL.O)

We see APPL as a great value here. It is a high dividend-paying tech stock with high earnings quality. Earnings growth is expected to resume following the launch of the iPhone 7. Apple has robust free cash flow generation and a strong cash position. We see a growing installed base (up 80 per cent in three years) benefiting future product replacement cycles. We note net cash per share over $29 and see the cash increasingly employed for dividends, stock repurchases and small bolt-on acquisitions. We see an iPhone 8 'super cycle' (September 2017 release) offering downside support should products this fall disappoint.

Gilead Sciences (GILD.O)

The healthcare sector, one of the stronger sectors for earnings growth over the next 12 months. Gilead Sciences has market leadership in both Hep C and HIV medication sales. It has a solid pipeline as well as strong cash flow and actual value in this overpriced market. We see the competition by Merck’s Hep C overblown. GILD HCV drug, Zepatier was approved and priced at $54,600 for a 12-week regimen, lower than GILD's Sovaldi and Harvoni, which may enable MRK to gain some market share, but see GILD maintaining a market share of about 85 per cent. GILD repurchased $9 billion in stock and as of June 30, 2016, has $11 billion remaining in its repurchase program.

• Then: $43.00
• Now: $46.14
• Return: +7.30%
• TR: +7.61%

Williams-Sonoma (WSM.N)

• Then: $51.03
• Now: $52.77
• Return: +3.41%
• TR: +4.12%

IBM (IBM.N)

• Then: $151.28
• Now: $158.73
• Return: +4.92%
• TR: +5.83%

Total Return Average: +5.85%