Overview: Global stock markets were mixed last week as generally strong second-quarter earnings were overcome by concerns over new COVID-19 Delta variant developments. Investors are evaluating the sustainability of strong growth seen in second-quarter earnings releases as the Delta variant now dominates recent COVID-19 cases (see earnings comments below). In the U.S., the S&P 500 index ended down -1.0%, while international developed (MSCI EAFE) and emerging markets (MSCI EM) were down -0.5% and up 1.7% respectively. In bonds, longer yields continued to trend downward, with the 10-year Treasury finishing the week at 1.30%. Despite inflation concerns, the 10-year Treasury has declined in yield from 1.75% at the end of March. On the economic front, U.S. core consumer prices (CPI) rose 5.4% year-over-year, above expectations and significantly higher than the Federal Reserve’s 2% long-term inflation target. U.S. retail sales rebounded by 0.6% in June, as demand for goods stayed strong as the economy continues to recover.
This week: Second-quarter earnings will continue to be in focus, with a light economic calendar that will include data on housing, purchasing, and initial claims. On the fiscal front, the Senate is scheduled to begin consideration of a $1.2 trillion infrastructure package that would fund spending on highways, bridges, and broadband, among other projects. There will be growing debate in Congress whether more fiscal spending will be needed to continue to stimulate the economy, and the timing, amount, and how any stimulus will be paid for will be closely watched by the markets.
A Note on Earnings: (from JP Morgan) With early reporters in the door (10.9% of market cap), our current estimate for 2Q2021 S&P 500 operating earnings per share (EPS) is $46.19 ($36.82 ex-financials). If realized, this would represent year-over-year (y/y) earnings growth of 72.4% and an increase of 15.1% from 2Q19. However, earnings growth is slowing on a sequential basis, with current estimates pointing to a contraction of 2.6% quarter-over-quarter. At the sector level, financial company results have beaten expectations; however, this was primarily driven by another round of reserve releases, and the key question going forward will center on the consumer’s willingness to take on more debt. The industrial sector is set to see significant y/y gains in EPS, as the airline industry is expected to be cash-flow positive and profitable for the first time since the pandemic began. As the earnings season continues to unfold, we expect materials, health care, and technology to post strong results compared to both last year and 2019. Looking ahead, current full-year consensus estimates are tracking y/y EPS growth of 57.6% for 2021 and 10.6% for 2022; if these forecasts are realized, and 2023 sees earnings grow at an average pace, the S&P 500 forward P/E ratio could fall to 20.1x by 4Q22, assuming the S&P 500 price index grows at its historical average growth rate. However, much of this will depend on whether companies can defend profit margins, particularly in the wake of higher costs as reflected in the June CPI report.

Weekly Returns and Data:

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, AGF Investments

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