Week Ended April 30 and the Week Ahead
This week was mainly about earnings as 180 of the S&P 500 companies across a variety of industries reported their quarterly results. Although there were some disappointments, revenue growth and earnings generally continue to exceed analysts’ consensus expectations. There was a lot of attention on the FAMAG stocks, all five of which reported stellar quarterly results. The strong top and bottom line growth of these and many other companies inspired confidence in equities, also boosted by the on-going dovish stance of the Fed and the Biden Administration’s incremental $4 trillion spending spree it is proposing to address infrastructure and a variety of social programmes. The outlook for the pandemic in most countries, including (at last) the EU, is also rapidly improving although trouble spots like India remain.
Economic data continues to flow in that shows the strong recovery in the US, with the UK and Europe likely to follow suit. Naturally, the combination of robust economic data confirmed by strong earnings seems to have finally caught up with the rates markets, as government yields resumed their climb last week in the US (10-year +7bps W-o-W), the U.K. (+10bps W-o-W) and Germany (+6bps W-o-W). The US Treasury bond market, having found stability after sharp increases in yields earlier in the year, saw yields break out to the upside mid-week, pushing the yield on the 10-year UST back above 1.60% (Friday close 1.65%). Although a reflection of robust post-pandemic economic growth ahead, it also signals potential inflationary pressures and tends to spook higher volatility stocks / sectors / indices. There is little disagreement that higher inflation is on the horizon although the magnitude – and whether it is transitory or not – remain the principal discussion points. The effect on asset prices is fairly clear, with base commodities, cyclical equities (that is the ones not affected adversely by the semiconductor shortage) and real estate all rallying into the trade, whilst high volatility equities take a beating.
In US equity markets this week, the DJIA was the poorest performer, somewhat surprising given that AAPL and MSFT both clobbered their earnings even as some other DJIA components (AMGN, BA) missed.
As far as earnings, the week started with mixed results from TSLA on Monday after the close, which used a combination of realised gains on BTC sales and carbon credit sales (again) to move from an operating bottom-line loss to a profit. It was similar to what we have seen in the past from TSLA as far as the carbon credits, although TSLA-lovers should not despair because every time pundits are convinced that the emperor has no clothes, the stock finds support and rallies. More importantly, the magnitude of revenue and earnings beats by the FAMAG stocks was truly astounding, although prices of some of the stocks were little changed or – like AAPL and MSFT – even fell. It might be difficult on the surface to justify why this would happen given the backdrop, other than to state the obvious which is that valuations remain in front of earnings. This is much more pronounced in many of the tech high flyers (as opposed to FAMAG and other more established companies), but there is a good chance that many stocks might pause for a quarter or two whilst earnings catch up with their lofty valuations. I consider this healthy, although it might at times prove to be a bumpy ride. OF course, keep in mind too that tech stocks suffer the most from increasing UST yields. For those of you that want to know more about earnings of the S&P 500 stocks, check out the weekly update from Refinitiv here, noting that 1Q21 earnings and revenue growth (Q-o-Q, 21 vs 20) of the S&P 500 is revised upwards (again) to +46.3% and +11.6%, albeit the base is the pandemic-effected 1Q2020.
Globally as far as equities, the FTSE 100 was the best performer on the week amongst the indices I track. However, the S&P 500 finished the month of April with the best monthly return across the indices. The US and European markets have generally performed strongly YtD, whilst Japan has also done well but has struggled the last few weeks. The emerging markets are in positive territory too YtD, with China being the only index I track that is in the red for the year.
Credit is holding its own so far, too, even with pressure on underlying rates. Spreads grind ever-tighter week after week, and investor demand for new issues remains robust. Spreads and yields edged a few basis points tighter in the corporate high yield market, whilst the BBB-rated corporate credit market experienced slightly higher yields on the week (through Thursday close) attributable to the sell-off in USTs. Again, I stress that IG corporate credit is vulnerable to rate rises although I suspect it won’t gap down in price, whilst high yield offers more of a buffer for the moment.
Higher US Treasury yields caused the US Dollar to pause its decline, as the global reserve currency strengthened during the latter half of the week. Gold continues to be largely indifferent to inflationary pressures, perhaps because it is already priced in or simply because investors are tilting towards riskier assets “encouraged” by central banks and – at least in the US – potential government stimulus coming at a pace not seen in 50+ years. I think we have probably found a floor in the mid/high $1,700s/oz, but there are a lot of factors other than inflation influencing demand for gold. Oil staged a nice rally this week, reflecting the increasing confidence in the post-pandemic economic recovery. Cyrptocurrency investors breathed a sigh of relief, too, as BTC staged a strong rally to end the week, recovering from a decline that saw it dip below $50,000/BTC less than one week ago. There’s no debate that these currencies, led by BTC, are slowly gaining mainstream appeal, at least for now.
In case you missed my mid-week article “Infrastructure: The American Jobs Act”, you can find it here. It will give you a good flavour of the massive $2.25 trillion (plus) infrastructure plan being proposed by the Biden Administration, one more stimulus measure that – if passed – will undoubtedly boost US economic growth and lower unemployment faster than otherwise.
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