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The restart of economic activity is real, and well underway. As this condition broadens, we remain confident in our pro-risk stance; underweighted in government bonds and a focus on increasing exposure in developed foreign markets. Yes, bond yields have fallen but we do not believe this accurately reflects the recovery. Moreover, based on manufacturing reports, it is plausible that the U.S. is close to peaking while Europe, along with other developed markets, will likely benefit as the global economy continues to recover.
The Fed, in recent testimony, acknowledged further progress toward its inflation goals but perceives room for improvement prior to talks of tapering asset purchases. From our perspective, tapering should be in motion given the incredible force behind the recovery. Nevertheless, we see very little reason to believe tapering will become reality before early next year.
Last week U.S. stocks hit record highs, and U.S. 10-year government bond showed signs of life after better-than-expected nonfarm payrolls data. Treasury yields have been under heavy pressure and the recent recovery in yields following the strong jobs data underpins our continued underweight. In other words, even if real yields rise, they are not likely to move out of negative territory. Do not infer from our pro-risk stance that stocks are destined for impressive performance without some resistance. In fact, we firmly believe that inflation and interest rates could present hurdles and the ride higher will not (likely) continue without some turbulence.
Earnings season is just about complete.
- Nearly 90% of companies inside the S&P 500 Index have reported. Earnings grew by nearly 89%, up from estimates of 52% at start of the quarter. This is quantifiable evidence that a recovery is in progress.
- In aggregate, earnings have come in at 17.1% above expectations, well above the five-year average of 7.8%. Revenue growth increased to 25%, up from 16.5% at the beginning of the quarter and nearly 20% when earnings season began. Prominent themes include strong demand, reopening momentum, supply chain constraints, input price pressures, still-elevated operating leverage and margins, capital return increases and optimism regarding the spread of the Delta variant.
Bottom Line: Global demand remains strong, but certain metrics portend global growth may be past its peak. At the very least, conditions suggest the U.S. has likely seen its peak as the baton is passed to Europe. China remains a wildcard in terms of how they will affect the financial markets.
COVID-19, and the so called “Delta Variant” has created new concerns as new U.S. cases hit a six-month high last week. Fortunately, the variant is said to be less harmful, but more contagious. Still, the (economic) recovery continues; we are adapting to life with COVID.
From our perspective, equity markets will remain vulnerable to pullbacks as investors will likely place greater emphasis on earnings and consensus expectations. Despite myriad challenges, global equity markets proved again last week. Perhaps a signal that as long as fundamentals are strong, stocks can weather the storm. Give us a call or email to get started.
