Small- and mid-cap stocks (SMID) have underperformed large-caps over the past 12 months, but may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from global events. As well, the prices of SMID stocks generally are lower than the prices of large-caps. As well, there are long stretches in the record books when SMID stocks have outperformed large-caps. That said, SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks over a 2003-2021 test period, versus 4.3% for large-caps. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record.

Monday Tee Up: Is Inflation Still Trending Down?

In this edition, we explore if Generac's clean energy strategy holds water; light vehicle demand in China; and the near-term oil and gas supply market; and FMC, Spirit AeroSystems, and Green Thumb Industries.

Stocks rose again on Wednesday morning as investors weighed new retail sales and producer price data, along with strong earnings from Target. The Commerce Department said that U.S. retail sales fell 0.1% in October after a revised 0.9% increase in September. The Reuters consensus forecast had called for a decline of 0.3%. Meanwhile, producer prices pointed to continued progress on inflation. The Labor Department said that its producer price index for final demand fell 0.5% in October, the largest decrease since April 2020, after a 0.4% increase a month earlier. The Dow rose 0.3%, the S&P 0.2%, and the Nasdaq 0.2%. Crude oil fell nearly 2% to $77 per barrel, while gold traded near $1965 per ounce.

Small- and mid-cap stocks (SMID) have underperformed large-caps over the past 12 months, but may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from the Russian invasion of Ukraine, high European inflation or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps. SMID stocks can be risky, but diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 12%-15% of the U.S. stock market's capitalization is comprised of SMID stocks. For our purposes, we use a threshold of $20 billion to define a SMID stock.

Stocks fell on Friday morning, extending Thursday's sharp selloff, as investors weighed hawkish comments from Fed Chair Powell in Jackson Hole. Mr. Powell said that the Fed would 'hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,' and that the central bank was 'prepared to raise rates further if appropriate.' Mr. Powell also reiterated that the Fed would maintain its 2% inflation target. The Dow fell 0.1%, the S&P 0.2%, and the Nasdaq 0.3%. Crude oil rose 1% to $80 per barrel, while gold fell $11 to $1936 per ounce.

Certain longer-term measures of momentum and breadth have cycled back to bullish territory, some of which we have mentioned before. Longer-term measures take time to turn and are designed to get o in and keep you in for most of a bull market -- and to get you out and keep you out for the majority of a bear market. On Monday, we talked about monthly NYSE margin debt turning bullish.

Top-level inflation pressures eased again last month in the U.S., continuing the downward trend over the last year, according to the Consumer Price Index report released on Tuesday. Core inflation also fell. The CPI numbers were generally in line with consensus expectations and Argus forecasts. The Bureau of Labor Statistics reported a 3.0% increase in overall inflation year-over-year through June, compared to a 4.0% rate through May and a 9.1% rate back in June 2022. The core rate, excluding the impact of food and energy prices, fell as well -- to 4.8% in June from 5.3% in May. Segments of the economy with stable/easing prices relative to last year included Gasoline (-26.5%), Used Cars & Trucks (-5.2%), and Medical Care Services (-0.8%). The overall rate was propped up by Transportation Services (8.2%), Shelter (7.8%), and Food (5.7%), which tend to have stickier prices. Looking ahead, we think that the June 2022 CPI rate of 9.1% will mark the peak for the index in this cycle, as the housing market cools off, supplies of new vehicles are replenished, and the price of oil stays below $90 per barrel. The Federal Reserve has lifted the feds fund rate from zero to more than 5.0% over the past 15 months, and the rate hikes appear to be reducing inflation. The next question is whether the aggressive rate hike campaign will tip the economy into a recession as inflation heads toward 2.0%.

For the past several weeks, Vickers has reported on a turn in insider sentiment. Vickers' data was very bullish for over a month starting back in May, and stocks responded in kind - advancing broadly. Insider sentiment signals then turned cautious, and over the past few weeks we have suggested that some consolidation might be in order. While this cautious trend reversed briefly, as highlighted in our last report, activity picked up last week with a clear signal that investors are watching closely in advance of the 2Q earnings season.

Stocks started a new bull market in 2Q23, as the S&P 500 climbed 20% above bear-market lows from last October. For the quarter, the index climbed about 8%. Performance was narrow in 2Q, led by last year's laggard sectors, including Communication Services, Consumer Discretionary, and Technology. Last year's top-performing sector, Energy, and the Utility sector, were the worst performers in 2Q23. The average stock in the diversified Argus Universe of Coverage rose 4% in the quarter, and the median stock advanced 2%. The average Argus BUY-rated stock rose 5.7%, while the average HOLD-rated stock gained 1.2%. We recently raised our sector rating on Consumer Discretionary to Over-Weight, as the employment environment is strong. We also look for a pick-up in EPS growth in Communication Services and Technology, and expect these groups to pace broad market performance. Below are the top 10 performers from the Argus Universe in 2Q23, many from Technology and Communication Services. After that, we list the bottom five performers.

Stocks held up on March 13 after some ugly early action that saw the S&P 500 (SPX) down about 1.3%. The index rallied almost 100 points by late morning before selling off over the balance of the day. It was a great session for day traders, but created more agita for the rest of us. The morning low coincided with chart support in the 3,780-3,810 region from the late-December low. On March 14, gains were solid and broad-based.

Investors Concede High Likelihood of Lost 2022, Brace for 2023

Small- and mid-cap stocks (SMID stocks) have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from the Russian invasion of Ukraine. As well, the prices of SMID stocks generally are lower than the prices of large-caps. SMID stocks can be risky -- and large-caps outperformed SMID stocks in 11 of the 19 years in our test period. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 12%-15% of the U.S. stock market's capitalization is comprised of SMID stocks. For our purposes, we use a threshold of $20 billion to define a SMID stock.

The S&P 500 ran into key resistance recently at the 4,175 region and, so far, the pause looks like it could be a bull flag. The index has come a long way, so we will give the bulls the benefit of the doubt in the short term. Of course, a break of the flag to the upside would bring the next piece of resistance into view at 4,225, which is a 50% retracement of the bear market.

Stocks rallied on Friday morning, paring some of their recent sharp losses. However, the major indices were still on track for their sixth straight weekly decline amid continued concerns about inflation and the Fed's ability to control it. In an NPR interview on Thursday, Fed Chair Jerome Powell reiterated that the central bank would likely raise interest rates by 50 basis points at each of its next two meetings, but that it was 'prepared to do more' if the data warranted. The Dow rose 1.4%, the S&P 2.1%, and the Nasdaq 3.6%. Crude oil rose $4 to $110 per barrel, while gold traded near $1813 per ounce.

Stocks rallied on Friday morning, paring some of their recent sharp losses. However, the major indices were still on track for their sixth straight weekly decline amid continued concerns about inflation and the Fed's ability to control it. In an NPR interview on Thursday, Fed Chair Jerome Powell reiterated that the central bank would likely raise interest rates by 50 basis points at each of its next two meetings, but that it was 'prepared to do more' if the data warranted. The Dow rose 1.4%, the S&P 2.1%, and the Nasdaq 3.6%. Crude oil rose $4 to $110 per barrel, while gold traded near $1813 per ounce.

Small- and mid-cap stocks (SMID stocks) have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from the Russian invasion of Ukraine. As well, the prices of SMID stocks generally are lower than the prices of large-caps. That said, SMID stocks can be risky and large-caps outperformed SMID stocks in 11 of the 19 years in our test period. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 12%-15% of the U.S. stock market's capitalization is comprised of SMID stocks. For our purposes, we use a threshold of $20 billion to define a SMID stock.

Small- and mid-cap stocks (SMID stocks) have underperformed large-caps over the past 12 months, but still may be in a better position to generate market-beating returns going forward. For one thing, SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from the Russian invasion of Ukraine. For another, the prices of SMID stocks generally are lower than the prices of large-caps, as the P/E ratio on the Russell 2000 Small-Cap Index is 16x compared to a P/E of 27x for the S&P 500. Finally, the long-term record has favored SMID stocks over large-caps. From 2003-2021, the Russell 2000 Index had climbed 544%, compared to an advance of 401% for the S&P 500 index. Here are a handful stocks with market caps below $20 billion that are on the Argus BUY list.

Stocks gave up early gains on Wednesday morning as investors continued to watch developments in Ukraine, and Western nations imposed a first round of sanctions on Russia. On the earnings front, Lowe's shares rose 3% after the home improvement retailer posted better-than-expected 4Q results and raised its sales and earnings guidance for 2022. The Dow fell 0.1%, the S&P 0.4%, and the Nasdaq 0.5%. Crude oil traded near $92 per barrel, while gold rose $3 to $1911 per ounce.

Our rating on the Industrial sector is Over-Weight. After enduring the challenges of the pandemic, the cyclical stocks in the Industrial sector appear well-positioned within the changing political environment. Specifically, we believe that Industrial stocks will benefit from enhanced infrastructure investment and more-lenient trade policies during the Biden administration. The Industrial sector accounts for 8% of S&P 500 market capitalization. Over the past five years, the weighting has ranged from 7% to 12%. We think that investors should allocate 9%-10% of their diversified portfolios to the group. The sector includes industries such as transportation, aerospace & defense, heavy machinery, and electrical equipment. The sector is underperforming the market thus far in 2021, with a gain of 13.5%. It also underperformed in 2020, with a gain of 9.0%, and slightly underperformed in 2019, with a gain of 26.8%. Here are some of our top picks, all of which are rated BUY at Argus.

Over the weekend, the House of Representatives approved the largest public works bill since the 1950s. The bipartisan trillion-dollar bill, which was passed by the Senate in August, now goes to President Biden's desk for signing. The plan focuses on improving the country's infrastructure, from roads and bridges to water systems and electricity grids. It also targets the auto industry, with a focus on electric vehicles and charging stations. In the power sector, Biden's goal is to achieve a carbon-free power industry by 2035. To improve energy efficiency in buildings, he is looking to retrofit four million buildings in the four years. Elsewhere, business Services companies also stand to benefit; bond issuance should pick up given that the infrastructure spending plan will be financed at least in part by bonds; and payroll companies could get a boost processing more paychecks as the infrastructure plan creates "millions of good paying jobs." All-in-all, some of the companies that we think may benefit include the following.

Back with a Vengeance: Our Monthly Survey of the Economy, Interest Rates, and Markets

Back with a Vengeance: Our Monthly Survey of the Economy, Interest Rates, and Markets

The United States economy is full of innovation. It has to be. Manufacturing industries that dominated the economy decades ago - textiles, televisions, even automobiles to a large degree - have moved overseas, where costs are lower. Yet the U.S. economy, even during the pandemic, has expanded to record levels. If U.S. corporations weren't innovating, the domestic economy would not be growing and capital would not be flooding into the country. Consider that U.S. GDP was approximately $1 trillion in 1930 but nearly $23 trillion at the end of 1H21. That's growth of 23-times. Meanwhile, the U.S. population has grown less than three-times during that time span, to 320 million from 120 million. The delta between GDP growth and population growth has been driven, in large part, by innovation. In addition, the value of listed corporations on U.S. stock exchanges at the end of 2020 was approximately $41 trillion, according to SIFMA, representing 38% of global equity market capitalization, while U.S. GDP represented only 26% of global GDP. The current low level of interest rates and the relatively high level of the dollar both attest to the confidence that global investors have in the innovative U.S. economy.

Generac Power Systems designs and manufactures power generation equipment serving residential, commercial, and industrial markets. It offers standby generators, portable generators, lighting, outdoor power equipment, and a suite of clean energy products. Sales generated in the United States account for the majority of total sales.

This edition features digital adversiting and regulatory risk; our quarterly telecom outlook; new coverage of backup power leader Generac; and notes from Continental, Goldman Sachs, and Boston Beer.

Second-quarter earnings announcements are nearly complete, with some 90% of S&P 500 companies having reported. The profit recovery from the depths of the pandemic low in 2Q20 was been swift, with earnings growth of 93% in 2Q21, according to Refinitiv. But earnings do not look good just on a relative basis -- the $53.93 projected to be earned by S&P 500 companies for the second quarter is the highest ever for the index. Investors can now turn their attention to the third quarter, when earnings are expected to rise a still-strong 30% year-over-year. Our analysts are always on the lookout for companies that raise their outlooks during earnings season. Management's ability to "raise guidance" can often be a catalyst to strong returns in the quarters ahead. Here are 20 BUY-rated companies in Argus coverage for which management has raised guidance or increased its outlook during the 2Q21 EPS reporting season.

Earnings Topping Already-High Expectations

The second quarter in 2021 was a good one for stocks, as the S&P 500 increased more than 8.5%. The average stock in the Argus Universe of Coverage advanced 5.5%, and the median stock gained 4.0%. The average Argus BUY-rated stock increased 6.0%, while the average HOLD-rated stock rose 4.0%. Will investors continue to favor value in 2021? Will small-caps continue their recent strong run? Given low interest rates, we expect growth stocks will resume outperformance over time -- but think this may be the one year in five when value leads. Investors seeking value are encouraged to focus on dividends and look for yields in the 3%-4% range. As for small-caps, the promise of the vaccine is encouraging for these companies, which typically don't have the gilt-edged balance sheets of large-caps and are more dependent on a strong U.S. economy. Small-cap valuations remain depressed despite the recent run, and this group continues to look well-positioned in 2021.

The U.S. housing market has been a positive contributer to the economic recovery. The National Association of Realtors recently reported that existing home sales are healthy at a 5.9 million seasonally adjusted annual rate, recovering from a 3.9 million rate in May 2020. The Commerce Department reported that new home sales, which were down 33% in April 2020 from January 2020, recovered to 10-year-high levels of more than 1 million sales per year last August and remained elevated at a 1.02 million rate in March. Building permits were up almost 80% in April 2021 compared to April 2020, according to the Census Bureau. Though most of these indicators have cooled, housing prices have not. The S&P/Case-Shiller National Home Price Index for February 2021 showed that prices gained 12.0% year-over-year, up from 11.2% in January. Meanwhile, inventory levels are tight: currently there is an ultra-low 3.6-month supply of existing homes for sale (the average range is 4.5-7.5 months), according to the U.S. Census Bureau. On the other side of the pandemic, demand for homes -- with yards between neighbors and plenty of space -- should remain solid, though current trends may cool a bit as interest rates rise.

The 1Q21 EPS season is mostly in the books, with retailers the last group to report over the next two weeks. The results were impressive -- but came against an easy comparison with last year's 1Q, when the world started to shut down to fight COVID-19. Through early May, Refinitiv reported that S&P 500 earnings rose 50.4% year over year -- the best quarter since 1Q2010. Some 87% of companies have come in ahead of expectations, up from the prior four-quarter average of 76%, according to Refinitiv. Where is the growth? Consumer Discretionary remains atop the list with a 170% earnings increase. Financials is second at 130%. Only Industrials is expected to remain negative -- with a 2% decline. Even the Energy sector, expected to have an earnings decrease at the start of the quarter, is now poised for 8% growth. Our analysts are always on the lookout for companies that raise their outlooks during earnings season. Management's ability to "raise guidance" can often be a catalyst for strong returns in the quarters ahead. Here are 20 BUY-rated companies in Argus coverage at which management has raised guidance or increased its outlook during the 1Q21 EPS reporting season.

Stocks were mixed on Thursday morning following news that the Biden administration would support intellectual property waivers on coronavirus vaccines. Pfizer and Moderna shares were down sharply, though JNJ was flat. On the employment front, the Labor Department said that first-time claims for state unemployment benefits fell to 498,000 for the week ended May 1, down from 590,000 a week earlier and below the Bloomberg consensus of 538,000. The Dow rose 0.4%, the S&P rose 0.1%, and the Nasdaq fell 0.3%. Crude oil fell 1% to $65 per barrel, while gold traded near $1815 per ounce.