Economic Week In Review
• Nine of the 11 GICS sectors posted losses, with materials (-3.2%), utilities (-3.1%) and industrials (-1.5%) leading the market lower. Energy (+3.3%) moved higher with continued strength in oil prices, and financials (-0.1%), though negative, were a relative outperformer. Cyclical sectors (-0.5%) edged defensives (-0.6%) even as Treasuries were mostly weaker. Small caps (+0.5%) outperformed large caps (-0.5%), while value (-0.3%) fared modestly better than growth (-0.6%).

• FactSet’s bottom-up S&P 500 EPS estimate for Q3 earnings has increased 3.7% intra-quarter, versus a 5-year average decrease of 2.9%.

Risks To Our Outlook
Between healthy retail sales and solid manufacturing surveys, our view appears to be correct that a strong consumer and manufacturing data will be the key drivers of growth. However, this likely increases the chances of a tapering announcement sooner rather than later, and probably starts the clock on actual tapering before year end.

Markets are beginning to assess proposals that would increase the corporate tax rate and the minimum tax on U.S. companies’ income earned overseas.

The near-term path of least resistance for stock prices could be lower, as equity markets may react negatively to a slowing of earnings revisions momentum, the forecast for Fed tapering and stumbling blocks to reconciliation and stimulus.

Despite these risks, global economic and equity market fundamentals remain strong, and we still think markets can successfully navigate the current macro headwinds.

Best Ideas
Supportive monetary policy and stronger relative earnings growth in developed non-U.S. markets, particularly Europe, will be the catalyst for select stocks in cyclically oriented sectors to outperform. We remain broadly bullish on emerging markets, but continue to monitor the regulatory environment in China. Near term in the U.S., we are adding to defensive sectors and structural growth stocks. At the same time, we favor a long-term approach that balances these exposures with cyclicals and value stocks exhibiting strong earnings growth and pricing power.

In Focus: Semiconductor Shortage Shows No Sign Of Ending
Of all the supply chain disruptions plaguing the economy, none has been as exasperating as the shortage of semiconductor chips — essential to the manufacture of virtually every modern device, appliance or vehicle with electronic components.

Covid-19-related factory closings and shipping logjams, along with surging demand for consumer electronics, are both contributing to the far-reaching shortage.

The auto industry has been particularly hard hit. One trade association estimates that U.S. carmakers will produce 1.28 million fewer vehicles this year, a number we think may be too low. Meanwhile, the lack of new production has fueled a spike in used car prices, contributing to rising inflationary pressures in recent months.