Overview: Stocks around the world moved higher last week, with both U.S. and international equities about 1.0% higher. In the U.S., the S&P 500 index reached record highs, with strong corporate earnings and a favorable jobs report overcoming COVID-19 Delta variant concerns. The labor markets continue to recover, with U.S. non-farm payrolls rising by 943,000 in July while the unemployment rate fell to 5.4%, both better than expected. The economy is exhibiting increased hiring, despite the Delta variant concerns, limited labor supply, and supply chain constraints. Initial jobless claims continued to show improving labor market conditions as well, moving lower to 385,000 for the past week. In bonds, interest rates moved higher after the strong jobs report, with the 10-year Treasury yield ending the week at 1.29%. Short-term rates remain near all-time lows, with the 2-year Treasury finishing the week at 0.21%.
Upcoming this week: We will get key data on inflation this week, with consumer prices (CPI) reported on Wednesday, and producer prices (PPI) Thursday. CPI and PPI are expected to print at 5.5% and 7.3% respectively on an annualized basis. This will add to the debate over whether inflation is transitory or permanent, and may put pressure on the Federal Reserve to begin tapering their asset purchases by late this year. Wage inflation is an increasing concern, and the Fed faces a difficult choice around the timing of pulling back monetary support. The Fed will attempt to strike a balance between fighting the Delta variant while risking weakening the economic recovery by tapering asset purchases. We believe that any tapering will be announced well ahead of implementation, and will be very gradual. In addition, the Fed will continue to keep the fund’s rate near zero for the foreseeable future.
A Note on Earnings: (from JP Morgan) With the 2Q21 earnings season nearly complete, we are currently tracking operating earnings per share (EPS) of $49.25; if realized, this would represent a growth of 84% year-over-year and 5% quarter-over-quarter. Growth rates have been buoyed by easy comparisons, increased mobility and a resurgence in demand, with the industrial, consumer discretionary and energy sectors each expected to grow earnings by over 100% relative to a year prior. However, despite these widespread, positive results, companies that have beat on both earnings and revenues have seen relatively lackluster performance in response; this likely stems from an investor focus on cautious guidance, continued supply chain disruptions and higher input costs. In this week’s chart, we illustrate the number of times phrases such as “supply chain disruptions,” “freight costs” and “commodity cost” were mentioned during earnings calls – 2Q21 is currently tracking to be the highest in a decade. Although supply constraints have boosted prices and profits in 1H21, we seem to be reaching an inflection point, with the combination of dwindling inventories and higher costs potentially weighing on profit margins in the second half. For example, many auto and tech companies noted that production will fall in 2H21 and warned they are seeing higher transportation and input costs due to a shortage of both shipping containers and materials such as semiconductors and plastic. Looking ahead, the outlook for 2022 earnings will hinge on companies’ ability to defend current margins.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Econoday, AGF Investments
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