Week Ahead: Equity Gains To Resume On Blowout Earnings; Dollar To Head Higher

 | May 02, 2021 12:57

  • Largest monthly increase in US personal incomes on record 
  • Fed’s Kaplan calling to consider tapering QE earlier than expected

    • Forecasts for earnings growth during the current reporting season have almost doubled, to 46% from 24% predicted at the start of April. Of the companies reporting, 87% have beaten earnings expectations on an EPS basis, putting the current quarter on course for the most beats on record, at least since Refinitiv—the source for the above statistics—began tracking the data since 1994.

    As such, equity markets appear positioned to move higher in the week ahead.

    On Friday, however, most US stocks on the Dow Jones, S&P 500, NASDAQ and Russell 2000 retreated from all-time highs after economic data signaled inflation was on the rise. Compounding market worries, Dallas Fed President Robert Kaplan said it was time to begin "the conversation about reducing central bank support for the economy."

    The dollar vaulted higher.

    h2 Excess Risk Taking; Reflation Trade Steps Back/h2

    In Kaplan's view, expressed during virtual remarks on Friday, there are clear signs of excess risk-taking occurring in the market. He sees that as the cue for the Federal Reserve to begin considering tapering its $120 billion monthly bond buying. Kaplan, "reiterated his expectation that the Fed will need to start raising interest rates next year, more than a year earlier than most of his Fed colleagues anticipate."

    The S&P 500 pared its biggest monthly gain since November, after US personal incomes, in March, enjoyed the largest monthly increase on record thanks to stimulus checks. Data for this measure has been compiled since 1946.

    As well, the Fed’s key gauge of consumer prices, the “personal consumption expenditure price index,” climbed 2.3% YoY, its steepest advance since 2018.

    It’s important to remember that these extraordinary economic results look remarkable only because they are being compared to a year ago when the economy was at a standstill due to the rapidly spreading coronavirus pandemic. We made a similar point at that time as well, noting the inconceivable data produced after the March 2020 bottom. We were dismissive, as well, about the market's rapid climb after the event.

    We'll admit, however, that we were wrong. What followed were the best returns in decades.

    Will the same thing happen now?

    We can't, of course, know. Credit Suisse’s Jonathan Golub increased his target for the SPX from 4,300 to 4,600, as earnings are too good to ignore. On the other hand, Aberdeen Standard Investment's head of North American equities, Ralph Basset, thinks the optimism is largely priced-in and high valuations are maxing out. Finally, JPMorgan Chase has advised traders to prepare for a reflation comeback as the economic reopening accelerates.

    Get The App
    Join the millions of people who stay on top of global financial markets with Investing.com.
    Download Now

    Still, on Friday, the reflation trade took a step back. Energy dropped 2.5%, underperforming all other sectors. Another laggard as the trading week came to a close—the Russell 2000, which has represented value stocks due to the small cap domestic business listed on the index that have suffered during lockdown.

    Yields, including for the 10-year Treasury benchmark, rose for the week, snapping a three week decline.