Market at record high despite delta variant concerns

Thoughts

• Equity markets rallied to close the week at a record high, as investors ignore the challenges faced by rising coronavirus cases and focus on the strong fundamental picture. The rally was broad based, with similar gains for large versus small, growth versus value and international versus domestic. Oil prices have dropped nearly 15% since early July on fears that rising cases will choke global growth, but equity investors have adopted a glass-half-full approach.
• Earning season is largely over, with 90% of the S&P 500® Index companies having reported. Growth is tracking towards 90%, up from just 64% at the beginning of earnings season. Over 86% of companies beat earnings estimates and 87% topped sales estimates. The themes were consistent across industries, including reopening momentum, supply chain constraints, input price pressures, improving operating leverage and an acceleration in capital return to shareholders. Muted stock price reactions to beats reflect that positive surprises were already priced into shares. Growth is expected to decelerate going forward, with 25% forecast for the third quarter and 21% expected in the fourth quarter before falling to 9% next year.
• Investors are enjoying a blissful picnic while storm clouds gather on the horizon. The fact is, equity markets are more vulnerable to a shock now than they have been in months.

News

• Coronavirus cases hit six-month high of more than 100,000 with the acceleration coming despite a bump in vaccination rates. The current wave on infections has been far less deadly than the one in January, with death rates still down 86% despite cases now down just 60% from the peak. There are growing worries about the efficacy of the vaccine, with 35% of hospitalizations in the U.K. among those that are fully vaccinated. Doctor Fauci hopes for full FDA approval by the end of the month, paving the way for vaccine mandates. The rebound in cases is shifting corporations’ plans for return to office, with Amazon pushing the date into 2022.
• The Senate is on track to pass the $1 trillion infrastructure deal, with the $550 billion in incremental spending spread out over five to ten years. The next step is more complicated, with House Speaker Pelosi refusing to address the infrastructure bill without the Senate passing the $3.5 trillion domestic spending package. Some moderate Democrats are pushing for a standalone vote while raising concerns over the $3.5 trillion price tag.
• July’s payroll report surprised to the upside, adding 943,000 (best since last August) with the unemployment rate falling to 5.4%. The strongest growth was seen in leisure and hospitality, followed by education, and professional and business services. Average hourly earnings rose 4% from a year ago, continuing the theme of inflation pressure. The report was seen as paving the way for the Fed’s tapering, resulting in the 10-year Treasury yield bouncing to 1.30% after touching 1.14% last Wednesday. Some high frequency data points show a moderation in activity, with Bank of America total card spending decelerating meaningfully, with sluggishness in retail and recreation. The New York Fed’s Weekly Economic Index reflects growth of more than 8%, though that is the slowest level since March.

What to Watch

• Inflation will continue to be in focus this week, with CPI on Wednesday and PPI on Thursday. Data is slim otherwise, with NFIB Small Business on Tuesday and consumer sentiment on Friday.