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May 2023

Core Equity – Staying the Course

Key Points

  • Portfolios have the right blend of defense and offense
  • Valuations have risen on lower forecasts for earnings
  • Focus remains on high quality companies at fair prices

Our portfolio positioning remains defensive, aligned with CNR’s higher-for-longer investment thesis and expectations for a mild recession in 2023. 

Three additional observations support our defensive positioning:

• First, while the strong start to the year for the S&P 500 is encouraging, digging beneath the surface reveals that the market’s advance was very narrow. Excluding strong gains for the technology and communication services industries, the overall index was essentially flat in the first quarter. The Russell 2000 was down 2%, further illustrating the lack of breadth.

• Second, while it is also encouraging that consensus 2023 EPS growth forecasts for the S&P 500 have now declined from 11% to 1%, we still think that is too high compared to our probability weighted expectations of -3.5%.

• Finally, combining the increase in the S&P 500 price level over the first quarter with a decrease in consensus earnings expectations means that valuations have increased.

Given these factors, we continue to believe it is prudent to maintain a defensive tilt in our portfolio, while staying focused on high quality companies selling at reasonable prices that have the right blend of defense and offense. Specifically, we like companies that have strong management teams, unique market franchises and market share, and strong fundamentals. We believe these attributes can help companies successfully navigate through the mild recession we are expecting, while also positioning them to emerge on the other side with growth prospects that are better than their peers. 

Using our proprietary definition of what constitutes a quality company, Chart 1 illustrates that our core strategy has an above average quality rank. 


Our defensive tilt is illustrated in Chart 2 by the below average exposures we have at the industry group level compared to the S&P 500. Specifically, we have less exposure to cyclical industries as these areas will likely have greater negative earnings revisions if the mild recession unfolds. Conversely, we have greater exposure to companies and industries that have more stability in revenue and earnings.


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