Investors continue to buy the dip despite the COVID-19 resurgence

Thoughts

• Equity markets have surged to record levels, with investors continuing to buy any dips in the market despite rising virus concerns. Strong earnings calls, aggressive share buybacks, accelerating M&A activity and a record IPO environment supports the bull case and makes it very difficult to short the market, though this behavior is more associated with late-cycle behavior than early cycle. Despite strong index moves, sentiment and momentum indicators reflect heightened caution. Investors have returned to their “comfort blanket,” with large-cap technology leading the way. The bond market reflects a greater level of stress ahead of the FOMC meeting, with the 10-year Treasury yield back to 1.25%
• The media’s attention is focused on a surge in COVID-19 cases, including so-called “breakthrough cases” among the vaccinated, with discussions of global shutdowns and the return of mask mandates. Investors are showing little reaction, betting that the appetite for renewed shutdowns is low and focused on the fact that cases, hospitalizations, and deaths are a fraction of the January peak.
• Bulls remain in charge of the equity market, as any weakness on growth uncertainty or COVID-19 fear is quickly overcome by buying pressure.

News

• One-quarter of the S&P 500® Index companies have reported, with 88% reporting earnings upside and 86% with better-than-expected sales. Earnings growth is on pace to be up 74%, the best since the emergence from the financial crisis. Companies that beat earnings are seeing a near-1% price boost, in line with the five-year average. This week is the busiest of earnings season, with over one-third of the S&P 500 companies scheduled to report, including the five largest by market capitalization, including Apple, Microsoft, Amazon, Alphabet (Google) and Facebook. Attention will be paid to management commentary around labor and supply shortages, along with pricing power.
• Second-quarter GDP growth will be released on Thursday, with the consensus estimate for 8.7%, versus 6.4% in the first quarter. The NY Fed’s Weekly Economic Index suggests a pace of growth above 8% in each of the past 17 weeks, though the rate of growth is slowing. Economists are beginning to drop forward estimates in a sign that growth has peaked, with Goldman Sachs now expecting a sharper deceleration than previously expected on heightened virus risk. Bank of America cut the forecast for 2021 by 0.5%, citing peak growth and inflation, along with risks from the Delta variant.
• Wednesday’s FOMC meeting is not expected to drive any major policy change, though the statement and Chair Powell’s press conference will be closely watched for signs of taper timing. Analysts expect discussion at August’s Jackson Hole Symposium, with a formal announcement in December. Recent bond market action, including a bearish curve flattening, is indicative of worries about a policy error by the Fed. Chair Powell is widely expected to reiterate his view that inflation is transitory but may concede that supply chain bottlenecks could take a while to clear.

What to Watch

• The primary focus of investor attention will be earnings, the FOMC meeting and second-quarter GDP. Other notable releases include new home sales on Monday, durable goods, and consumer confidence on Tuesday, pending home sales on Thursday, and PCE deflator, personal income and spending, and consumer sentiment on Friday.