Weekly Market Update Highlights
• High valuations, a flattening yield curve, peaking growth and Covid-19 variants are likely to keep equity markets highly susceptible to volatility.
• However, historically low interest rates should help produce solid economic growth through 2021.
• Though risks remain, global growth is likely to become more synchronized.
• We remain highly selective in the U.S., thanks to elevated multiples, focusing on reasonably priced growth stocks and value sectors that benefit from infrastructure spending, such as industrials.
Broad-based developed market indices were net gainers last week, while the MSCI Emerging Markets index lost over 2%. Monday’s volatility, largely driven by Covid-19 Delta variant headlines, led to one of the worst days for equities so far in 2021, but those losses were quickly reversed and the S&P 500, tech-heavy Nasdaq and DJIA all closed at record highs on Friday.
Market Drivers And Risks
• Fueling the volatility engine. If “peak/slowing growth” is the engine driving recent equity market volatility, news regarding the Covid-19 Delta variant was a high-octane injection last Monday.
• It was the worst day for equity markets so far in 2021, but the pullback did not last long. Investors bought the dip and the S&P 500 closed at a record high on Friday. Trading at nearly a 20% premium to their 5-year average P/E, U.S. equities may experience an increasing number of pullbacks in 2021. Stocks should also be supported by accommodative policy, as well as strong corporate and consumer balance sheets. It is important to remain selective, and we favor adding to high-quality companies within defensive sectors like consumer staples to help contend with pockets of volatility.
• A double-edged sword. We remain confident that non-U.S. equity markets will eventually outperform as vaccinations allow for sequential global growth. However, vaccinations remain a double-edged sword for markets as the spread of the Delta variant creates a greater degree of volatility in different markets, likely due to lagging vaccinations rates.
• We have already seen improvement in the distribution of vaccines globally, as well as economic data that indicates a corresponding recovery is occurring abroad. Eurozone PMI hit a 21-year high last week, though this has yet to translate into outperformance for international markets. However, S&P 500 constituents with greater sales exposure outside of the U.S. are experiencing higher levels of earnings growth, providing an optimistic ballast for sequential recovery.
• Earnings continue to surprise to the upside. According to FactSet, 88% of the 125 S&P 500 constituents that have reported second quarter earnings have had positive EPS surprises. Additionally, blended earnings growth for the quarter hit 74.2%, nearly 20% higher than consensus forecasts on 30 June.
• 100% of companies within health care, information technology, real estate and utilities have reported earnings above estimates, so far, while the energy sector has the lowest percentage of companies surprising to the upside at 75%. Additionally, companies with negative EPS surprises, in aggregate, are being punished less than they have been over the past five years, with their stocks experiencing a 25% smaller drop, on average, in the wake of their earnings releases. We continue to preach selectivity given these lofty growth rates, and prefer high-quality companies that stand to benefit from future economic drivers such as increasing capital expenditures.