Profits push stocks to record highs
Highlights from the weekly market update
â¢ We are seeing pressure on margins this earnings season due to headwinds of rising costs and supply chain disruptions.
â¢ We remain committed to an approach of selecting quality growth and value stocks as economic expansion continues to slow.
â¢ Declining jobless claims and other positive data continue to support our view that the Delta variant has stunted economic growth, but not ended it.
â¢ We remain vigilant on inflation, but any relief for supply chains should help normalize prices.
Global equity markets continued their three-week winning streak last week on strong earnings. In the United States, the S&P 500 index closed 1.7% higher, setting a new record on Thursday, with the DJIA and NASDAQ each adding more than 1% as well. Outside the United States, the MSCI EAFE, EM and ACWI outside the USA appreciated by 0.6%, 0.8% and 0.7% respectively.
Market factors and risks
â¢ Skepticism about the Federal Reserve’s interest rate plan remains high, because the markets seem to integrate rate hikes earlier than the schedule announced by the Fed.
â¢ Although the Fed has set the rate lift-off for 2023, markets have clearly expressed their lack of confidence in the central bank’s ability to maintain long-term growth. Currently, markets are forecasting two rate hikes in 2022 and three more in 2023. We believe the Fed can remain more accommodating than the markets realize, as long as inflationary pressures on wages do not worsen. But any political misstep could create significant volatility.
â¢ Negotiations on an infrastructure spending package seem to be reaching a critical point, as some in DC believe a vote on a bipartisan deal could take place as early as this week.
â¢ This accelerated timeframe seems optimistic given the number of potential obstacles that remain to secure enough votes. But one critical piece of information has been confirmed: President Biden has publicly admitted that there probably isn’t enough voice to pass a corporate tax increase. This move could wipe out what had been a noticeable surplus for stock markets, with some estimates calling for a 5% impact on the S&P 500’s earnings in 2022 if the tax rate was lowered from 21% to 25%.
â¢ Profit growth rates remain high compared to historical averages, but they have slowed down significantly compared to the two previous quarters.
â¢ The S&P 500’s mixed earnings growth reached 33%, which would be the third highest growth rate since 2010 if it holds, surpassed only by 2Q21 (91%) and 1Q21 (52%). This 33% rate is also higher than the consensus estimates of 27% as of September 30. Despite the deceleration in earnings growth, better-than-expected results overall and recently squeezed valuations helped the S&P 500 reach a new all-time high.
Economic week review
â¢ Ten of the 11 GICS sectors posted gains for the second week in a row thanks to strong earnings, the growing likelihood of an infrastructure spending bill, and continued improvement in Covid-19 trends. The real estate sector added 3.2%. Health care, financial services and utilities each added between 2.0% and 3.0%. Communications services (-0.6%) posted the only negative performance, again, due to the disappointing earnings ripple effect of a well-known media and service company. All other sectors gained between 0.9% and 2.0%.
â¢ Questions about the sustainability of the buy-the-dip mentality were answered when weekly inflows of global equity funds peaked in five weeks for the week ending October 20. This influx of dollars follows a drop of more than 5% in the S&P 500 that ended in early October. Technology and financial stocks benefited from significant inflows, with secular growth supporting the former and rising rates the latter.
Risks to our outlook
The Fed will come under scrutiny as it tiptoes towards reduction. With markets so accustomed to quantitative easing and low rates, volatility is likely to increase as investors become wary of a timing or scale misstep.
The deal to delay the deadline for the US debt ceiling may have calmed markets for now, but volatility may continue to surface as the December 3 deadline approaches.
Earnings season could prove to be more of a headwind for equities, as investors begin to digest the real fallout from the Delta Variant surge, the tax and regulatory risks of legislative plans, the chain issues. supply and business warnings.
While it appears that increases in U.S. corporate tax rates can ultimately be avoided, markets have yet to assess the expected impacts of potential increases in other U.S. tax rates, including a minimum tax on foreign income. American companies.
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