Last week’s market activity was probably not what most investors would have expected: growth and renewable energy stocks led while long-term interest rates declined and credit spreads tightened. In addition, the Consumer Price Index (CPI) was above 5% for the fifth consecutive month and oil prices reached their highest level since 2014. On the surface, securities prices and economic data may appear disconnected; however, we believe the market is still expecting transitory inflation. In our view, the duration of transitory inflation remains dependent on the primary market driver: the pandemic. The Delta variant not only delayed the reopening process globally, but several Asian countries had “zero COVID” policies until very recently, including China. As the global reopening resumes, labor shortages should ease and delivery bottlenecks should improve. As such, an indicator like the Baltic Dry Index had its biggest weekly decline since 2008 as container ship prices fell to their lowest level in three weeks.
U.S. equities had their best week in three months as the S&P 1500® closed the week above its 50-day moving average. Mid-cap equities drove returns for the week, led higher by renewable energy stocks in the Information Technology and Industrials sectors.
The MSCI World ex USA Index outperformed domestic and emerging markets (EM) thanks largely to strong performance from Consumer Discretionary industries such as luxury apparel, automobiles and household durables. We think solid earnings from these industries suggest a healthy global consumer backdrop.
The MSCI EM Index was led higher by high growth Consumer Discretionary stocks, as well as more economically sensitive Financials and Materials companies. The MSCI China Index closed the week above its 50-day moving average for the first time since June as officials from China’s central bank finally stated in public that debt issues at China Evergrande Group are “controllable.”
Fixed Income Markets
The 10-year U.S. Treasury yield declined after seven consecutive weeks of rising interest rates, and the yield curve flattened to its lowest level in a month. It was also the third month in a row that the 10-year real yield (spread between the nominal and breakeven rate) declined on the same day CPI was reported. If investors were anticipating elevated inflation to remain beyond the short term, we would expect real yields to be in positive territory; instead, they remain deeply negative.
Weekly Earnings Season Recap
Third-quarter earnings season has begun with 8% of S&P 500® constituents having reported. The blended earnings growth rate (actual growth rate combined with consensus estimates) is 30.0%, an improvement from the 27.5% growth rate estimated at quarter end.
Financials led earnings higher for the week, with most banks reporting above-consensus estimates. Reserve releases and fee income were better than expected as J.P. Morgan and Goldman Sachs were among banks that saw investment banking fees benefit from merger advisory strength. Despite the earnings beats, loan growth remains muted and the banking industry lagged the S&P 500 for the third consecutive start to earnings season.
Fourth-quarter earnings revisions have increased to 22.0% from 18.6% at the end of the third quarter. The consensus estimate for earnings growth for the 2021 calendar year has slightly decreased to 43.1%, and 2022 estimated growth has declined slightly to 9.4%. This week, 78 S&P 500 companies will report earnings.