What’s Pushing Stocks Up and What Wall Street’s Saying

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Stocks rose Monday as economic data paints a picture consistent with what is found in the earnings. 

The S&P 500 rose 0.72%, aided by a gain in the tech-heavy Nasdaq, which rose 1.47%. The 10-Year treasury yield, pressed of late even as economically-sensitive stocks rise, went up to 0.55% Monday. Yields rise when prices fall. In July, bond investors have been more bearish on the speed of the recovery than stock investors have been, a dynamic that wasn’t the case Monday. 

Tech stocks in the S&P 500 comprise roughly 40% of the S&P 500’s market capitalization, with FAANG stocks comprising almost 25%. That means a good day in tech stocks may mean a good day for the S&P 500. Friday, Apple  (AAPL) - Get Report, Amazon  (AMZN) - Get Report and Facebook  (FB) - Get Report shot up, with Apple up 10%, after Thursday earnings reports showed resounding strength in growth areas like e-commerce, digital advertising and Apple’s app store. With earnings estimates revised upwards, investors now feel even more comfortable paying high valuations to own these names, especially during severe economic uncertainty. The NYSE FANG Index rose 1.46%. 

Cyclical value, which has had a good run in the past month, performed well on Monday, too. Oil and consumer discretionary both rose marginally. Large cap industrials rose 0.75%, respectively.

Chinese and U.S. manufacturing data for the month of July both beat expectations, with readings of above 50, or year-over-year growth. This validates the narrative that the global — and highly integrated — industrial economy is rebounding quickly from the Covid-19 crisis. 

That’s consistent with earnings reports that are showing that companies are seeing sales and earnings rebounds that point to a fast recovery. Before the second quarter earnings seasons began, analysts were looking for a 45% contraction in earnings per share, but that’s now at 35%, according to data from multiple strategists. Companies on the S&P 500 are beating expectations by about 18%, compared to 3% historically. And this is seen across sectors, with 80% of companies reporting beating EPS estimates. Third quarter revisions are upwards on net, as well. 

Here’s what Wall Street’s saying: 

Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:

“Breadth continues to narrow, and something has to give. Either the risks to the recovery--COVID case spike, election concerns, fiscal cliff--need to subside and the market broadens or these risks will ultimately topple the winners, too. In short, we view the current skew between the COVID beneficiaries and laggards as an unhealthy sign, and therefore unsustainable. We think the most likely outcome remains a 10 percent correction in the broader index led by the beneficiaries before the recovery and bull market continues.” 

Jason Pride, Chief Investment Officer, Private Wealth, Glenmede: 

“Great Expectations for Mega-Cap Stocks. Many of the largest companies have been relative short-term beneficiaries of the COVID 19 crisis, as demand for their products and services has held up well. Investors appear to be extrapolating some of these eye popping earnings results into the future. For example, Amazon trades at a 111x next-twelve month earnings, implying massive expectations for earnings growth beyond. In particular, analysts’ consensus is for 40%+ earnings growth for every year until 2023 and 30%+ thereafter. Top Companies Don’t Stay on Top Forever. The historical record shows that the largest companies in the S&P 500 don’t always have a lot of staying power. For example, since the 1960s, only a little more than half of companies that ended a decade in the top 5 as a share of market capitalization remained in the top 5 at the end of the next decade."

Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS: 

"On the eve of earnings season, we thought estimates looked conservative, but the scale of the earnings beats has been eye-popping. The earnings beats have been broad based: It's not just the high-profile. mega-cap growth companies that are blowing away numbers. The outlook for the third quarter also looks brighter. The recovery looks set to continue, supported by additional government stimulus. While the pace of the improvement in profits will depend on the virus and additional government support, there could be upside to our 2020 S&P 500 EPS estimate of USD 122 (–26%). The range of outcomes for 2021 still remains wide. Our estimate is USD 156 (+28%). So we advise investors to position for the upside in equities. The rally has been uneven. The big six US tech companies (Facebook, Apple, Amazon, Microsoft, Netflix and Google’s holding company Alphabet) have rallied by 32% year-to-date on a market-cap-weighted basis, while the rest of the S&P 500 has declined by 5%. We see this an opportunity to rebalance to other growth areas, such as 5G, where we see both enablers and platforms beneficiaries well positioned to deliver double-digit growth.” 

Michael Sheldon, Chief Investment Officer, RDM Financial Group to TheStreet: 

"One reasons the yield curve is not widening is that the Fed is signaling they’re going to continue to buy assets. If yields go higher, the Fed very well may increase the amount of purchases to put a lid on treasury yields for now.” There’s been some talk in the market that if treasury yields start to rise, the Fed or treasury may come out with comments that they will actually put a ceiling on the level of interest rates and will stand ready to buy an unlimited amount of bonds.” 

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