Markets at record highs as earnings surprise to the upside
April 19, 2021
Equity markets are in a four-week winning streak that drove the S&P 500® Index to a record high, returning 12% to date in 2021. The rising tide is lifting all boats, but the recent rally shows a reversal of the relative year-to-date trends. Large caps continue to rebound relative to small caps over the past month (+7% vs. -1%), while growth is recovering relative to value (+10% vs. +4%). Participation in the rally is broad-based, with the equal-weight S&P 500 outperforming cap-weighted by 4% this year, while the largest percentage of companies are above the 200-day moving average since October 2009. Nearly 40% of the S&P 500 hit a 52-week high last week.
Sentiment indicators suggest the market may be at risk for a pullback. The AAII Sentiment Survey shows 57% of respondents are bullish, the highest level in over three years. Fund flows reinforce this trend, with greater equity flows in the past five months tan in the prior 12 years combined.
Interest rates continue to settle, with the 10-year Treasury yield below 1.60% after spiking to 1.75% in late March, as the forced selling of Treasuries by banks to meet revised Supplementary Leverage Ratio guidelines expired. A wave of new issuance has been absorbed by the market with strong demand, holding rates and credit spreads low.
Economic data continue to show acceleration, with retail sales up 9.8% in March, the largest gain since last May, led by a 12.4% jump in sales at restaurants and bars. This reflects pent-up demand and the boost from stimulus checks. Unemployment claims fell below 600,000 for the first time in nearly a year. High-frequency data reflect the strength of the recovery, with the NY Fed’s Weekly Economic Index (WEI) at 11.7%, the highest on record. Time spent outside the home remains 7% below pre-pandemic levels, but that compares with -16% in mid-February.
Early results for first-quarter earnings are encouraging, with the blended growth rate for the S&P 500 at 30%, up from the 25% expected as we entered earnings season. Sales growth is now expected to be near 10%. Earnings are now expected to grow 28% in 2021 and 14% in 2022. Banks reported results well above expectations last week, though the market was reluctant to reward those beats because of skepticism over the sustainability of the growth. Also, upside earnings results are priced in following the strong year-to-date performance, with the S&P 500 trading at 21x the 2022 estimate.
President Biden is scheduled to hold a bipartisan meeting to discuss the $2.25 trillion infrastructure deal, as more Senate Republicans signal support for a smaller deal. Senator Coons, a Democrat from Delaware, suggested that they work on a bipartisan agreement for phase one, and use reconciliation to pass the more progressive elements that are unlikely to pass on a bipartisan basis. Moderate Democrats continue to push back against the 28% corporate tax rate, with most expecting them to settle at 25% compared with the current 21% rate. This would represent just a 3% drag on earnings.
What to Watch
Earnings reports will be the primary driver of activity this week. A relatively light week of economic data awaits, including existing home sales on Thursday, and new home sales and PMI data on Friday.
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