Overview: Volatility continued in the global markets last week as inflation concerns pressured stocks. Stronger-than-expected U.S. inflation data and oil supply disruption in a crucial U.S. pipeline were keys that drove stocks lower, with the S&P 500 index finishing the week down -1.4%. On the inflation front, core consumer prices (CPI) rose 0.8% month-over-month (4.2% annualized), the largest monthly gain since 1981. U.S. producer prices (PPI) also surged 6.2% (annualized), above consensus as well. With the next Federal Reserve meeting not scheduled until mid-June, investors are currently in an ‘information void’ as to any monetary response or viewpoints from the central bank regarding inflation. Bond market yields were volatile last week, but settled down later in the week. The 10-Year Treasury yield reached 1.70% mid-week after the higher-than-expected inflation data, but recovered to 1.63% by week end. Despite inflation and bond supply concerns, yields have been fairly stable, with the 10-year Treasury trading in a range of 1.60 – 1.75% for the past several weeks.
Earnings Update: (from JP Morgan) With more than 90% of S&P 500 market cap having reported earnings, our current estimate for 1Q21 operating earnings per share (EPS) is $47.29, representing year-over-year growth of 143%. In a sharp departure from 2020, these positive results have been spread across all sectors, with those areas of the market hit hardest by pandemic now leading the charge. The energy sector is tracking earnings growth of over 900% following the collapse in energy prices a year ago, while financials are expected to see earnings growth of 146% as massive loan loss reserve releases, a steeper yield curve and robust capital markets activity offset weak loan demand. Additionally, increased levels of consumer spending and mobility have supported results in consumer discretionary and industrials, which are currently tracking growth of 118% and 39% versus a year ago, respectively. Looking ahead, earnings growth should be very strong in 2021, but could slow as profit margins come under pressure next year; many management teams cited profit headwinds stemming from higher input costs in their quarter results, noting the impact of rising commodities prices and transportation costs specifically. These findings are further evidenced by the April CPI report, which saw the largest monthly increase in more than a decade. Although this surge is likely “transitory,” it reflects a rapidly improving economy, strengthening the case for cyclical stocks and posing a challenge for long-duration bonds.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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