InvestMacro

Ever since the US stock market bottomed on 23 March last year, equities have been driven by brighter global growth expectations supported by fiscal and monetary policies and scientists who have worked towards eliminating the virus worldwide.

According to the most recent BofA report, equity funds have attracted $576 billion over the past five months, exceeding inflows recorded over the past 12 years. Investors have been left with few choices as sovereign debt markets and most high grade corporate bonds have been offering a minimal or negative real return. This environment has led valuations to skyrocket with the most followed benchmark S&P 500 trading at 22.5 times forward earnings, well above its 10-year average of 15.9 times and the highest since the late 1990’s dotcom bubble.

The upcoming weeks will provide a reality check on whether this bull market still has the potential to creep higher or some profits needs to be cashed out. The earnings season is kicking off this week with major banks announcing first quarter results, a year after the Covid-19 pandemic halted the global economy. As analysts have become more optimistic, earnings expectations for S&P 500 companies have been rising over the past two months and are anticipated to grow 25% in the first quarter of 2021 compared to a year ago.

With bond yields continuing to move gradually higher, forward earnings need to be brought a little lower. So, either shares prices need to correct to the downside or earnings have to beat markets expectations. Given that most technical indicators are reflecting overbought signals on the S&P 500, it seems like earnings will need to beat expectations by a significant margin to justify another leg higher.

JP Morgan, Wells Fargo and Goldman Sachs will all be announcing results on Wednesday morning, followed by Bank of America and Citigroup on Thursday. Financials have been the second-best performing sector so far this year rising 19%, with the energy sector topping that with gains of 27% so far this year.

Currency traders will also be closely watching data out of the US this week. The dollar has fallen against its major peers as the US 10-year Treasury yield has dropped from its 14-month peak. US bond markets have clearly become the number one factor moving the dollar and traders need to watch out to see whether yields will begin rising again following the past week’s declines or possibly consolidate around current levels of 1.6% to 1.7%.

US consumer prices released on Tuesday will be in focus following the largest annual gains in producer prices in almost a decade. Traders need to ignore the year-on-year changes given the very low base due to the pandemic and concentrate on any monthly moves to determine the trajectory of prices due to fiscal and monetary policies, challenges in supply-chain and expected consumers’ pent-up demand.

Thursday’s retail sales report will also be significant as it should continue to reflect the divergence between consumers spending in the US and the rest of the developed economies.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Dow, S&P 500, and the Nasdaq 100 all posted new record highs last week, although the futures contract for all three benchmark indices are easing slightly at the time of writing. From a technical perspective, such dips are only natural as these assets pull away form overbought territory, as adjudged by their respective 14-day relative strength indexes.

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Last week was also the calmest week for the US stock market so far in 2021, with this past Friday’s trading volume at its lowest since Christmas eve, according to Bloomberg data. Wall Street’s fabled fear gauge, the VIX index, fell to its lowest since February 2020, before the pandemic forced lockdowns across the developed world.

Perhaps the most pressing questions now: how long will this tranquility last, and can these benchmark US indices post fresh record peaks?

Much could depend on the key data and events this week:

Tuesday, April 13

• US consumer price index

Wednesday, April 14:

• Fed Beige Book
• Fed chair Jerome Powell speech
• US earnings season kicks off

Thursday, April 15:

• US retail sales and industrial production

Friday, April 16:

• US consumer sentiment

Inflation expectations still a primary driver of market sentiment

The outlook for US inflation still remains a hot topic for debate.

On one hand, markets expect prices to rise, fueled by the trillions that have been pumped into the economy by the US government and the Federal Reserve. On the other hand, Fed officials have often reiterated their expectations that any burst of inflation is likely to fade away. They have also sought to repeatedly assure the markets that policymakers have the tools to rein in inflationary pressures if they start to do damage to the economic recovery.

With all that in mind, Tuesday’s release of the US March consumer price index is set to be used as the next marker in ascertaining whether markets’ expectations for an inflation overshoot are warranted. Economists expect the month-on-month print to come in at 0.5%, 10 basis points compared to February’s reading. The year-on-year headline CPI is expected to come in at 2.5%, although investors will be cognizant of the low base effect from March 2020.

All that said, a higher-than-expected inflation reading could prompt more selling of US Treasuries, pushing yields higher while triggering volatility in equities. Overvalued tech names stand to lose out in such a scenario, potentially eroding the Nasdaq 100’s month-to-date gains of 5.76%.

Of course, investors will be parsing through all of the key events listed above, and assessing how each of them (Fed Beige Book, Powell’s speech, retail sales, industrial production, consumer sentiment) could fit into the broader narrative surrounding US inflation and the Fed’s policy response.

If markets get the impression that the Fed has got it wrong, and may have to ease up on their asset purchases and raise US interest rates sooner than expected, that could send a jolt across multiple asset classes and dampen the tech stocks party once more.

Earnings season to encourage risk-on mood?

Still, investor sentiment could be buffered by what’s expected to be the highest earnings growth for S&P 500 companies in a decade!

Earnings season kicks off on Wednesday, with financial heavyweights such as JPMorgan, Goldman Sachs, and Wells Fargo reporting their respective quarterly financial results.

According to FactSet, it’s estimated that earnings could grow by 23.8% year-on-year, although the actual figure might be at least 28%. More surprises to the upside could spell further gains for the S&P 500.

The main story around the US stock market remains the US economic recovery. Fed Chair Jerome Powell, in a TV interview that was aired over the weekend, said that the US economy is at an “inflection point” and that “the outlook has brightened substantially”. He also warned of that a resurgence of Covid-19 in the States is a major risk to the economic recovery.

Unless such a negative risk materializes, markets think that the recovery that runs too far too fast could influence the Fed policy outlook, although such a narrative is still subject for interpretation. A massive shift in expectations surrounding the Fed’s policy trajectory, which causes an unruly surge in Treasury yields, could upend the risk-on party. Also, if the inoculation efforts are derailed which dashes the optimism surrounding the US economic recovery, that could warrant a pullback in stocks as well.

Until such things happen, I do expect stocks to continue claiming higher ground over the near-term.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.