Markets stalled last week, with the S&P 500 IndexTM falling modestly for the first time in four weeks on profit-taking in the technology space. Overall, risk assets remain very strong, with stocks, bonds and commodities with their best four-month span on record. Equities and commodities have each gained more than 25%, driven primarily on aggressive government stimulus and hopes for a vaccine. Given the continued economic uncertainty, this diverse market strength is a sign of impressive resilience among investors and a “glass half-full” mindset.
The technology sector has been the primary catalyst for the recovery, now accounting for a record 38% of the S&P 500 (higher than the 33% seen in 2000), with the top-five names accounting for a record 22%. We have seen a recent broadening of leadership, however, with strength in small caps, value and emerging markets. Following a record period of underperformance by these groups, broader market participation is encouraging for the continuation of the positive market.
Second-quarter earnings are predictably weak, with 25% of the S&P 500 having reported. Earnings are on pace to decline 42% (slightly better than the 44% contraction expected as of 6/30) on a 10% drop in sales. Notable weakness was seen in energy, consumer discretionary and industrials. Companies that beat estimates are seeing a gain of 1.8%, while those that miss see a decline of 0.6%, both better than average. Estimates for the third quarter have been steady since May. Analysts predict a decline in earnings in the third-quarter of 24%, followed by a 12% decline in the fourth quarter before returning to growth in the first quarter of 2021.
Republicans are expected to release their proposal for a fifth coronavirus relief bill. The $1+ trillion plan includes a similar $1,200 check to the previous round, a continued (but reduced) enhanced unemployment support and funding for schools to reopen. In what is clear to be contentious with Democrats, there is liability protection for companies and no additional support for state and local government budgets.
The global economy is showing signs of outperforming the U.S. economy for the first time in a decade, as many economies are further down the reopening path. Europe saw PMI data at a two-year high, with both manufacturing and services in expansion and new orders at the best level in four years. There is some risk from a renewal in coronavirus cases across Europe, particularly in Spain. The E.U. agreed to a 750 billion euro ($857 billion) stimulus agreement, with a plan to jointly issue bonds and the funds issued to countries hardest hit by the pandemic as grants that do not need to be repaid.
The relationship between China and the U.S. remains strained, with disagreements over Hong Kong, the coronavirus outbreak, human rights abuses and accusations of espionage. President Trump is threatening to reinstate tariffs because China is not hitting targets. American businesses are expressing anxiety but aren’t making quick moves to exit despite harsh criticism by Secretary of State Pompeo.
What to Watch
Earnings report substantially accelerate next week, perhaps setting the stage for volatility. Economic releases include durable goods on Monday, consumer confidence on Tuesday, pending home sales on Wednesday, second-quarter GDP on Thursday and PCE deflator, consumer sentiment and personal income and spending on Friday. An FOMC meeting will take place on Wednesday.
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