End of May, 2021 | Market Update & Commentary | By. Tim Courtney

June 3, 2021

End of May, 2021 Market Update & Commentary

By. Tim Courtney | Chief Investment Officer

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Earnings season for Q1 2021 is wrapping up and we are coasting to an all-time earnings record. The
previous high for quarterly S&P 500 Operating Earnings was $41.38 in Q3 2018 but the estimate for
this quarter’s total now stands at $47.61. Every sector in the index had equal or better earnings than
those they booked in the last quarter of 2019 (pre- pandemic) with the exception of Industrials and,
not surprisingly, Real Estate. The biggest contribution to profits came from Financials which have been
helped by the market recovery and lower than anticipated loan defaults.

While many areas of the market barely moved in May (see below), investors needed to see this level
of earnings across broad sectors to justify one of the strongest 14 month market surges on record.
We will still need to see healthy earnings growth over the next several quarters to support prices
since stock valuations remain elevated compared to historical averages. We very well may get that
growth. Full year 2021 Operating Earnings estimates which were in the
$140 range last year are now in the $180-$190 range. Even if we fail to hit that level it appears
likely this year’s earnings will clear 2019’s total of $157. This growth is expected to be driven
by household savings, deferred consumption/spending on the part of households/businesses, low
interest rates, and increased immunization. Many Gross Domestic Product estimates for 2021 remain
at 6%+.

In May much of the market’s attention was directed towards concerns of inflation stemming from all
of the growth. While S&P companies reported what may be a record 13.0% profit margin (margins have
ranged from 5.9% to 12.1% over the last decade) many companies are noting labor and/or material
shortages within their sectors. This has been driving up input prices. These inflation worries,
along with a falling US dollar (-1.4% for the month) caused investors to reward assets that are
seen as partial inflation hedges such as Treasury Inflation Protected Securities (+1.2%), Gold
(+7.7%), Commodities (+1.9%) and MLPs (many of which are oil/gas pipelines, +7.6%). The inflation
issue and debate over whether it is temporary or a longer-term risk will no doubt persist in coming
quarters, and we are actively monitoring asset prices/trends to help guide our portfolio decisions.

The market should continue to benefit from good earnings and citizens re-engaging broadly within
economies. Many companies will have come through the shutdowns with more efficient operations and
businesses and households have benefited from much lower cost debt. As always though there are
risks to market prices, including supply chains that have not returned to normal, inflation that
could eat into historically high profit margins, and changes in regulations and the tax code.

As it has been for several months now, our base case is that the recovery will continue through
2021 into 2022 with longer-term interest rates and inflation slowly rising as the economy moves
towards normalization. We are not forecasting a market correction but we should acknowledge that a
market pullback would be completely normal. This is especially true given the last twelve month’s
rise in prices, high amounts of leverage/borrowing on margin, and the speculation we have seen in
certain corners of the market.

We still believe that investing in a diverse set of productive companies across broad economic
sectors is the most prudent course of action given that we find ourselves in an economic, fiscal,
and monetary environment without precedent.

Performance Summary
The S&P 500 index was just slightly higher (+0.7%) in May and is now up 12.6% YTD. Small companies
were also barely changed (+0.2%) as were bond indexes (+0.3%). However international stocks
performed well (+3.3%) aided by the dollar’s decline. Interest rates fell nominally for a second
month and the CBOE Volatility Index started and ended the month at a relatively benign level in the high
teens after briefly hitting 80 in March of last year.

There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will
need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no
assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk

Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission
(SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary
should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an
exemption or exclusion from registration or notice filing requirements.

All earnings data comes from Standard and Poors’ S&P 500 Earnings and Estimates Report as of 5/28/2021. Asset class
performance numbers come from Morningstar as of 5/31/2021.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed
or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index
includes 500 leading companies and covers approximately 80% of available market capitalization.

The CBOE Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day
forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market
risk and investors’ sentiments. It is also known by other names like “Fear Gauge” or “Fear Index.

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