In terms of market timing, current levels do certainly provide an attractive entry point. Expectations for market-level EPS growth have decreased YTD, however, the decline has been far less than the overall market decline. Barring an outright recession, which we believe the likelihood of is low, current EPS expectations are very reasonable and attainable, particularly after the overall retail margin weakness for the remainder of 2022 that the market is now pricing. We expect that from here (with equity sentiment and positioning at extreme lows), multiples have likely fallen enough, and should improve (or at least remain constant) from here. In short, we think that we are currently at or at least near the bottom. There is potential that we see multiples (and the market) decline further if negative sentiment persists and investors continue the risk-off trade.
That isn’t necessarily a bad thing for us. The companies in the strategy rank extremely high in terms of revenue quality, and margin consistency, and are minimally exposed to the categorical declines in consumer spending that retailers have reported over the past week (bigticket durables). So, in addition to our expectation for earnings to remain strong due to these factors, we may also see an additional uptick in multiple expansion as investors seek to maintain their equity exposures but shift to higher-quality companies to reduce risk.
Our allocation is broad-based as we are quite comfortable with current portfolio allocations and sector weights. One exception to this would be the energy sector allocation given its strong YTD performance across the board, making allocation here somewhat counter to the intention of buying the dip with additional capital.