According to the National Bureau of Economic Research, the COVID-19 recession lasted just two months, ending in April 2020. The S&P 500® hitting yet another all-time high on Friday is a stark reminder of the singularity of this pandemic-induced recession and the global policy responses to it. In our view, the unprecedented level of fiscal and monetary stimulus to bridge the gap during the global economic shutdown may mean the swift contraction ending the prior cycle could lead to an uneven recovery phase.
With that context in mind, we question just how much longer the economy can expand at an accelerating rate absent additional stimulus catalysts. Data in the past week collectively showed signs of exhaustion with the exception of resilience in the housing market.
The S&P 1500® bounced off its 50-day moving average on Monday, reaching all-time highs by Friday. Remarkably, the index has not had a pullback of more than 5% since last October.
Small- and mid-cap growth led returns for the week, driving markets higher. The Russell 2000® Growth Index found support at its 200-day moving average and delivered its best weekly return in a month with Information Technology and Consumer Discretionary stocks delivering outsized returns.
That growth style leadership saw surprising support in developed international equities, which have an inherent value tilt relative to the S&P 500. Performance from an industry perspective was led by semiconductors and consumer apparel, coinciding with Britain’s “Freedom Day” last week as lockdown measures were lifted.
The MSCI Emerging Markets Index was led lower by Chinese equities, primarily in reaction to Friday’s surprise ban on for-profit tutors by the Chinese government. In our view, this is the latest policy move that has hindered an otherwise fundamentally strong asset class.
Fixed Income Markets
Although longer-dated U.S. Treasury yields finished the week relatively unchanged from Friday, July 16, Monday saw a strong bounce up from technical support at 1.20%. At the same time, investment grade and high yield (HY) credit spreads bounced lower off of technical resistance. The HY index ended the week with spreads of 291 basis points (bps) compared to its all-time low of 230 bps, which should be a reminder that bond valuations are fairly stretched.
Table of the Week
Second-quarter earnings season continues with almost 24% of S&P 500 constituents having reported. The blended earnings growth rate (actual growth rate combined with consensus estimates) is 74.2%; if that holds, it will be at its highest in the past 20 years.
Financials and Industrials led earnings higher for the week, with significant beats above consensus estimates. However, forward guidance and revisions have been disappointing, and thus both sectors actually lagged the index for the week. Consumer Staples also had a strong week, with blended earnings growth up 11.0% as The Coca-Cola Company and PepsiCo, Inc. reported above-consensus earnings as consumption met or surpassed 2019 levels in several key markets.
Third-quarter earnings revisions have increased to 22.6% and the consensus estimate for earnings growth for the 2021 calendar year has increased to 38.0%, its highest level yet. This week we expect more than 160 companies to report earnings, which should be the busiest week for earnings season. We will continue to monitor the path of revisions for the third quarter as well as the 2022 outlook.