• Equity markets were modestly lower for the first time in five weeks, though the S&P 500® Index remains within points of a record high. April is set to close with the best monthly performance since November. The tailwinds that drove markets to records remain in play, including fiscal and monetary stimulus, vaccines, accelerating economic growth and upside to earnings. Strong fund flows and accelerating share repurchases are shifting the supply/demand metrics for equities. Long-term interest rates continue to settle following March’s surge, with the 10-year Treasury yield below 1.60% and credit spreads historically tight despite record issuance.
• The current backdrop for equities remains supportive, but there is an increasing tug of war between optimists and pessimists. The S&P 500 currently trades at 22x forward earnings, a level not seen since the technology bubble, and would be higher if corporate tax rates rose. Further earnings upside could be challenged by cost pressures and supply constraints. Finally, the strong recovery has economists shifting their expectations for a shift in Fed policy.
• Roughly 25% of S&P 500 companies have reported first quarter earnings, with a blended growth rate of 34%, the fastest growth in over a decade and up from 25% expected at the beginning of the month and 16% expected at the beginning of the year. A record 84% of companies have beat expectations. Like last quarter, companies that beat are having less positive stock price reaction than normal, suggesting that the good news is largely priced in. Common themes in management commentary include supply chain constraints, input cost pressures and price increases. This is the busiest week of earnings season, with over one-third of the S&P 500 set to report, including many high-profile technology companies.
• Economic data continue to impress, with existing home prices growing at rates that exceed the housing bubble, leading indicators rising at levels not seen since the financial crisis versus a year ago, and PMI data surging. The New York Fed’s Weekly Economic Index reflects record high-frequency data, signaling double-digit growth. The shift in growth expectations has caused the median of economists to now predict the Fed start tapering the $120 billion of monthly asset purchases by the end of the year and the beginning of rate increases in 2023.
• The Democrats’ infrastructure plan hit a snag this weekend, with swing Democratic Senator Manchin reiterating he does not support using budget reconciliation, suggesting they pursue a more focused, bipartisan plan target water, sewer, roads, bridges and broadband. Republicans now support a package as large as $900 billion (compared with the $2.25 trillion Democrat plan) and remain opposed to any tax increases. Markets were volatile last week following President Biden’s proposal to raise the maximum capital gains tax to over 43% from the current 20% rate.
What to Watch
• Earnings will continue to drive headlines, with one-third of S&P 500 companies reporting. The FOMC will meet on Wednesday, though expectations for a shift in policy are low. The initial look at first-quarter GDP growth comes on Thursday. Other economic data include durable goods on Monday, consumer confidence on Tuesday, pending home sales on Thursday, and the PCE deflator, personal income and spending and consumer sentiment on Friday.