Another week of booming US economic data and strong corporate earnings, including blowouts from some of the world’s largest technology companies, is in the books, yet the stocks only managed a mixed performance, fearing market participants have already priced a post-pandemic economic boom .
“The way markets behave has to do with investors’ concerns about whether the easy money has been made,” Saira Malik, chief investment officer at Nuveen’s $ 420 billion global equity division, told MarketWatch in an interview.
These concerns are not necessarily misplaced. “A lot of easy money has been made,” Malik said, “but there are still opportunities for winnings. However, investors need to be more selective and focus on companies and sectors that are more likely to raise rising earnings expectations, she said.
Related: The stock market is struggling as expectant earnings expectations go out of hand: economist
The last week was hardly a disaster. S&P 500 Index SPX,
and Nasdaq Composite COMP,
both traded in record range but no breakouts were to be achieved. Dow Jones Industrial Average DJIA,
ended the week down 0.5%, while the S&P 500 was largely flat and the Nasdaq Composite fell 0.4%.
Monthly results were nothing to sneeze at, with the S&P 500 rising 5.2% in April for its strongest month since Novembe. The Nasdaq’s rise of 5.4% for the month was the strongest since December. The Dow rose 2.7% in April.
The week ended with data showing a 21.1% increase in personal income in March, driven by fiscal stimulus control and accompanied by a 4.2% jump in personal spending. This was followed by an estimate of gross domestic product data, which showed that the US economy grew at a rapid 6.4% annual rate in the first quarter.
Read: Americans have a few trillion extra savings to keep the economy going
And the strong economic readings are almost certain to continue in the coming week, with the Institute for Supply Management set to release its production index by April Monday and its service sector in April Wednesday. On Friday, the job report from May comes with some economists seeing the potential for the payroll for non-agriculture to rise by more than 1 million.
The question of whether this is “as good as it gets” is understandable, given that booming data, especially for Purchasing Managers’ indices, often heralds monetary tightening from the Federal Reserve leading to a downturn, said Quincy Krosby, chief market strategist at Prudential Financial , which has $ 1.721 trillion in assets under management.
But the Fed remains committed to letting the economy run hot, she noted.
President Jerome Powell reiterated on Wednesday that it is too early to even consider talking about withdrawing from the central bank’s extraordinary monetary stimulus measures, arguing that signs of inflationary pressures remain “temporary”. And while some employers are complaining about labor shortages, the job market is still far from tight as the economy continues to recover from the pandemic, he said.
See: What’s next for the Fed? A signal of ‘taper’ from Powell in late August at Jackson Hole
A Fed on hold promises good for interest rate sensitive stocks, especially those tied to the consumer, as the economy continues to reopen, Krosby MarketWatch said.
Travel and leisure stocks and some other consumer-oriented parts of the market “can still perform extremely well,” she said. Add President Joe Biden’s proposals for infrastructure spending, and there is room for industrial as well as names of clean energy, which has already done well, for the benefit, Krosby said.
Malik is also optimistic for consumer-oriented businesses, while the industry will benefit from continued economic growth and infrastructure spending. Financial companies should be ready to beat earnings expectations and should benefit from higher interest rates as inflationary pressures push interest rates higher, she said.
Malik is also bullish on small capital holdings. While the small cap Russell 2000 RUT,
has surpassed the large cap Russell 1000 RUT,
by more than 2 percentage points year-to-date, the small cap index still looks undervalued, she said.
Malik noted that the 12-month futures ratio for Russell 2000 was at an 18-year low compared to Russell 1000, Malik noted, and record inflows into equity funds over the past five months have gone almost exclusively to large stocks, while small businesses have seen marginal outflows.
Over the past month, small capsules have underperformed thanks to the growing number of COVID-19 cases across the globe, particularly in Asia, and questions about whether economic reopening has been priced, she said. But small businesses need to be able to take advantage of rising commodity prices and inflation.
And then there is politics. Shares swept April 22 after a news report highlighted Biden’s plan to propose a near-doubling of the capital gains tax on investors earning more than $ 1 million a year to 39.4%. But these losses were soon erased.
Investors generally do not appear to be unaffected by Biden’s call for an increase in personal income tax on the wealthy and an increase in the corporate tax rate. The stock market performance during Biden’s first 100 days in office, which ran through Thursday, was among the best of any presidency.
This is partly because market participants expect feedback from some Senate Democrats, where the party has a razor-sharp majority, to dilute the proposals, analysts said. It is also expected that the economy-boosting spending proposals will boost the economy and earnings, especially for companies benefiting from infrastructure spending and other programs.
But tax increases and the prospect of increased regulatory control will contribute to a more selective environment that is more favorable to stock and sector choices, analysts say.
These factors and the fading of other “systemic tailwinds”, such as falling interest rates, will contribute to a transition away from a backdrop that saw “everything is favorable from a Wall Street perspective” to an environment of more differentiation, Brad McMillan said , chief investment officer at the Commonwealth Financial Network in an interview.
The market, meanwhile, may be due to a pullback, analysts said.
Given the scale of gains, it would not be a shock to see investors intimidated by any short-term, negative surprises on the tax front or talk around when the Fed begins to adjust its bond purchases, Krosby said, adding that at this point “is all recalls healthy. ”