Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
Major U.S. equity benchmarks were volatile throughout the week but the three major indexes finished with gains. The S&P 500 Index rebounded from losses in the previous week and hit an all-time high close on Friday. Earnings season continued last week with most companies highlighting very strong demand due to the combination of the vaccine rollout, monetary and fiscal stimulus, and economic rejuvenation. The S&P 500 rose by nearly 2.0%, the NASDAQ increased by 2.8%, the Dow Jones Industrial Average was up 1.1%. Stocks sold off sharply last Monday with an increase in COVID-19 infections from the spread of the Delta variant. Investors continue to point to the peak growth, peak profit, and peak policy themes as an overhang on risk sentiment, particularly in the face of stretched valuation, sentiment, and positioning. However, the longstanding buy-the-dip mantra returned, buoyed by bullish narratives revolving around easy financial conditions, central bank liquidity, fiscal stimulus, pent-up demand, and positive earnings surprises. The U.S. 10-year treasury yield ended the week at 1.28%, down one basis point from the previous Friday’s close. Gold was down 0.6%, ending the week at $1,802/oz. West Texas Intermediate Crude Oil rose 0.3% to end the week at $72.03/barrel.
Second quarter 2021 earnings season continued to ramp up last week, with very strong results relative to expectations. According to FactSet's latest Earnings Insight report, the blended growth rate for second quarter S&P 500 earnings is 74.2%, up more than eleven percentage points from the end of the first quarter. With nearly a quarter of the index having reported, 88% have surpassed consensus EPS expectations, ahead of the one- and five-year averages of 83% and 75%, respectively, and on track for the best performance since FactSet began tracking the metric in 2008. In aggregate, companies are reporting earnings 19% above expectations, better than the 8% five-year average, and on the heels of the record 23% positive surprise rate in the first quarter.
There were several major U.S. economic releases last week. The Conference Board’s US Leading Index rose by 0.7% month-over month. This comes after rises above 1% in April and May. U.S. economic activity slowed for the month of June according to the Chicago Fed National Activity Index. This aligns with the increased spike and concern surrounding the new Delta variant, which has caused some states to take modest additional precautions. U.S. Housing Starts rose 6.3% to a 1.6 million annualized pace for the month of June. This suggests residential construction is stabilizing amid continued labor shortages and supply-chain constraints. Building Permits, a proxy for future construction, continued its decline for the month of June and fell 5.1%.
In the week ahead, the FOMC will meet to discuss US interest rates and the Fed’s bond-buying program. Fed Chair Powell has recently defended the central bank’s support of the US economy even as inflation has been a topic of concern. Investors will get a look at the pace of US economic growth in the second quarter. Estimates are calling for strong GDP growth due to an increase in vaccinations, stimulus, and the reopening of businesses. COVID-19 will continue to be a topic of discussion for investors and will be critical to monitor how different nations react to the increase in cases. The summer Olympics are underway amid a state of emergency in Japan. Spectators are banned at events in and around the city. The Iraqi Prime Minister is set to meet with President Biden to discuss U.S. troop’s exit plan and the joint effort to defeat ISIS. Finally, it will be a busy week of earnings reports with bellwethers Alphabet, Apple, Amazon, Microsoft, Tesla, and Visa set to report.
As always, we will be watching and reporting to you next week. Thank you.
