Dow Jones 12.1% 22.6% Indices Year to Date 12 Months ...

Portfolio Strategy

Published by Raymond James & Associates

Michael Gibbs, Director of Equity Portfolio & Technical Strategy, (901) 579-4346, Michael.Gibbs@ David Hydrick, (901) 579-4812, David.Hydrick@ Joey Madere, (901) 529-5331, Joey.Madere@

September 14, 2017

Portfolio Strategy: Weekly Market Guide _______________________________________________________________________________________________________________

Short-Term Summary:

Equity Market Indices

Price Return Year to Date 12 Months

The S&P 500 was able to break out to new highs again over the past week, as did the Dow Jones Industrial Average and Nasdaq Composite. The S&P 500 Equal weight index and Russell 2000 have yet to follow suit, and will continue to be monitored for overall breadth of the market's advance. Also, the percentage of S&P 500 stocks above their 50 DMA and 200 DMAs improved, but remain below recent high levels.

S&P 500 Dow Jones NASDAQ Composite Russell 2000

11.6% 12.1% 20.0% 5.1%

17.5% 22.6% 25.3% 17.7%

Inflationary data ticked slightly higher in August, and continues to be watched by investors as they assess the path of future rate hikes. August headline CPI inflation was up 1.9% y/y and 0.4% m/m, from 1.7% y/y

MSCI The World

13.4%

MSCI Developed Markets 16.7%

17.2% 17.2%

and 0.1% m/m in July. Core CPI remained at 1.7% y/y, but was up 0.2% m/m from 0.1% in July. These readings resulted in the odds of another Fed rate hike before year end moving to 47% (currently) from 39% (yesterday). Furthermore, the Fed is widely expected to announce the beginning of balance sheet normalization at its September 20th FOMC meeting next week.

MSCI Emerging Markets NYSE Alerian MLP MSCI U.S. REIT

27.5% -10.3% 1.7%

24.1% -5.4% -0.1%

Forward S&P 500 earnings estimates have remained stable, although 3Q growth is expected to be the lowest of the year at 4.4% currently. This follows 1Q and 2Q S&P 500 earnings growth of 13.9% and 10.4% respectively. The energy sector, as its fundamentals recover from the collapse in crude oil prices, are expected to be about 39% of S&P 500 earnings growth in the coming quarter. Also, crude oil has risen back to $50/bbl, and the energy sector appears to be gaining some technical momentum, albeit from a depressed base. Also worth noting is that the U.S. dollar broke to new two-year lows this week, which should provide a boost to multinationals earnings moving forward. The softer U.S. dollar, in conjunction with broad improvement in the global economic activity, has also continued to be a tailwind to emerging market equities.

In sum: The S&P 500 was able to break out to new highs again this week, although some divergences remain beneath the surface. Also, volatility surrounding the path of tax reform is set to increase in the coming months, which could trigger volatility in the equity markets. Without tax changes, valuation is unlikely to move significantly higher. However pullbacks are likely to be limited as well, given the solid macroeconomic and fundamental backdrop.

Source: FactSet, Raymond James Equity Portfolio & Technical Strategy

Please read domestic and foreign disclosure/risk information beginning on page 8 and Analyst Certification on page 9.

? 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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Macro

This week, domestic economic data primarily consisted of August inflation readings. Headline CPI data was reported at 1.9% y/y in August, up from 1.7% in July. Core CPI remained at 1.7%, above expectations and up 0.2% m/m. With the unemployment rate at 4.4%, the Fed continues to evaluate inflationary pressures as they decide on future rate hikes. Following the CPI data, the odds of another rate hike before year end increased to 47% (from 39% yesterday). There are three more inflation readings before the December 13th. FOMC meeting.

Economic data reported in the past week (actual vs estimate): U.S. Wholesale Inventories m/m (Jul F): 0.6% vs 0.4%, 0.4% prior Consumer Credit (Jul): $18.499B vs $15B, 11.827B prior NFIB Small Business Optimism (Aug): 105.3 vs 104.8, 105.2 prior MBA Mortgage Applications (Week): 9.9% vs 3.3% prior PPI Final Demand m/m (Aug): 0.2% vs 0.3%, -0.1% prior PPI Ex Food and Energy m/m (Aug): 0.1% vs 0.2%, -0.1% prior PPI Final Demand y/y (Aug): 2.4% vs 2.5%, 1.9% prior PPI Ex Food and Energy y/y (Aug): 2.0% vs 2.1%, 1.8% prior Initial Jobless Claims (Week): 284k vs 300k, 298k prior Continuing Claims (Week): 1944k vs 1965k, 1951k prior CPI m/m (Aug): 0.4% vs 0.3%, 0.1% prior CPI Ex Food and Energy m/m (Aug): 0.2% vs 0.2%, 0.1% prior CPI y/y (Aug): 1.9% vs 1.8%, 1.7% prior CPI Ex Food and Energy y/y (Aug): 1.7% vs 1.6%, 1.7% prior

Eurozone Employment y/y (2Q): 1.6% vs 1.6% prior Industrial Production y/y (Jul): 3.2% vs 3.3%, 2.8% prior

China CPI y/y (Aug): 1.8% vs 1.6%, 1.4% prior PPI y/y (Aug): 6.3% vs 5.7%, 5.5% prior Retail Sales y/y (Aug): 10.1% vs 10.5%, 10.4% prior Industrial Production y/y (Aug): 6.0% vs 6.6%, 6.4% prior

Japan Industrial Production y/y (Jul F): 4.7% vs 4.7% prior

Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy

Portfolio Strategy

Keep an eye on inflation

Fed Rate Hike Odds at Remaining Meetings this Year

1 Week Ago Current

Odds of a Dec. rate hike jumped this week, following August inflation readings

46.7%

22.0%

0.0% 0.0% 9/201/2017

0.8% 2.8% 11/1/22017

12/133/2017

? 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters:The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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Fundamentals

Earnings: S&P 500 3Q earnings are expected to grow by 4.4%, followed by 10.9% in 4Q. Both of these have been revised slightly lower in the past week; however, full year 2017 estimates remain at ~$131 (bottom-up). Stable earnings estimates on strong growth has been a tailwind to equity markets this year, and earnings estimate revisions at the sector level have impacted relative sector performance in general as well (shown on right). Consensus earnings estimates:

o 2017: $130.12 (top-down strategists); $131.18 (bottom-up analysts). We are using $128 to formulate fair value S&P 500 levels.

o 2018: $141.75 (top-down strategists); $145.46 (bottom-up analysts).

Valuation: We think valuation is unlikely to expand much from 19.1x P/E without favorable tax reform or better economic growth. Our base case upside for the S&P 500 over the next twelve months remains ~2613. This incorporates $134 in earnings (downward revision from current consensus next 12-month estimate of $138) and a P/E of 19.5x. Our base case downside is ~2222 (17.5x P/E on current trailing earnings of $127). If we get favorable tax reform and better economic growth (without a rapid pick-up in inflation), $146 earnings in 2018 and a P/E of 19.5x would get the S&P 500 to 2847 in a bull case scenario. However if political gains fail to materialize, inflation picks up (unsettles bond market), dollar rebounds sharply, margins flatten, and earnings estimates come down without a recession, our base case downside is ~2100 (16x P/E on current $127 earnings).

S&P 500 - P/E

25.0

Last 15 Years

23.0

21.0

19.0

19.3

17.0

Average 16.1

15.0

13.0

11.0

9.0

7.0

Sep-02 Aug-03

Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 May-17

Source: FactSet, RJ Equity Portfolio & Technical Strategy

Return

Portfolio Strategy

2017 Earnings Estimate Revision vs Return (since 12/31)

30%

Technology

25%

Health Care

20%

15%

Materials

S&P 500 Utilities

Cons. Disc. 10%

Cons. Staples Industrials

Real Esta5%te Financials

0%

-20%

-15%

-10%

-5%

0%

5%

-5%

Energy

-10%

Telecom

-15%

Revision

S&P 500

2017 Estimated

since 12/31/16

Sector

Earnings Growth 2017 EPS Revision YTD Return

Cons. Discretionary

3.6%

-4.31%

11.11%

Consumer Staples

2.6%

-1.13%

7.12%

Energy

240.6%

-18.63%

-12.60%

Financials

11.5%

1.22%

6.40%

Health Care

5.4%

-2.24%

20.25%

Industrials

5.7%

2.68%

9.05%

Materials

22.8%

-6.99%

12.28%

Real Estate

4.9%

-1.89%

6.54%

S&P 500

9.6%

-1.50%

11.59%

Technology

10.7%

0.56%

25.71%

Telecom

-0.5%

-4.85%

-13.05%

Utilities

2.0%

1.88%

11.50%

? 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters:The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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Technical: Short Term

Source: FactSet, Raymond James Equity Portfolio & Technical Strategy. ? 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters:The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Portfolio Strategy

U.S. equity indices are trading at, or near, all-time highs. The S&P 500 printed a new all-time high in yesterday's trading.

With yesterday's price action, the index broke out of an "Ascending Triangle" pattern, suggesting the index can continue to move higher. With that being said, we continue to believe that upside price action is likely limited due to valuation.

However, with that being said, due to low interest rates and an overall positive economic backdrop, we think downside price action is also limited.

While September and October are traditionally the weaker months of the year, with yesterday's breakout, this year may prove to be an exception to the norm. Yesterday's breakout suggests the market could move to just above 2550, or approximately close to 2.5% from current levels, in keeping with its well defined trend channel as seen on the chart to the left.

Near term potential support levels: 2481- old highs 2462- 50 DMA 2436- April, May, August low trendline 2405- horizontal support

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Technical: Short Term

The percentage of S&P 500 stocks above their 50 DMAs and 200 DMAs both improved on the S&P 500 break out, but remain below prior highs (chart on right).

Also, the S&P 500 Equal Weight index has yet to break out (chart below); and the index's relative strength (vs. the S&P 500) has improved but still remains in a downtrend.

We continue to monitor these for signs that market participation is broadening out. We would like to see the S&P 500 Equal weight index continue to gain relative strength, and for the % of stocks participating in rallies to improve. These would be indications that internal market breadth is strengthening.

Portfolio Strategy

Source: FactSet, RJ Equity Portfolio & Technical Strategy

? 2017 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters:The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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