What Drove Stocks Tuesday, What Wall Street’s Saying

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Stocks rose Tuesday, as more economic data continues to paint a positive picture for the so-far fast economic recovery in the U.S. 

The S&P 500 rose 0.75%, brought up by the components of the tech-heavy Nasdaq, which rose 1.39%. The 10-Year Treasury yield, after having risen to account for the Federal Reserve’s new highly inflationary policy, fell to 0.67%. Still, the equity market was fairly risk-on. 

First off, big tech, which has a heavy market cap weighting in the S&P, was a big winner. 

Apple  (AAPL) - Get Report rose 3.98% to $134 a share after Bloomberg reported that the company has asked suppliers to produce components for 75 million 5G iPhones for 2020, which adds to the company’s expected unit sales for the year. More importantly, this is another indicator of strong hardware demand even through the pandemic. Apple shares have risen sharply of late, but the news is still a boost to investor interest in the stock.

 The market values Apple at roughly 30 times 2021 earnings per share estimates, which some say is a bit frothy. One analyst, though, just Tuesday raised his price target to $145 for Apple on 5G and services. He values Apple at 30 times 2022 ,a bit vote of confidence in the company’s long-term earnings stream. 

Semiconductors rose as well, with the iShares PHLX Semiconductor ETF  (SOXX) - Get Report up 1.99%, as the fund is home to several Apple suppliers. 

But cyclical value stocks, while still underperforming the market of late, rose as well. Large cap industrials rose just under 1%, as the Institute for Supply Chain Management’s manufacturing survey came in at a reading of 56 for the month of July, beating expectations of 54.9. Any reading above 50 represents year-over-year growth in activity. Materials rose more than 2%. The only cyclical sector in the red was oil. 

The manufacturing data, another indicator that the economy and corporate earnings trajectory is trending positively, is backward looking. Fiscal stimulus is needed to compliment monetary stimulus, which may potentially have a waning marginal impact on the economy and stock market. But Congress is currently on break, while small businesses need cash. This is a threat to the currently speedy economic recovery. 

One very recent development that is possibly lifting stocks is that President Trump’s reelection chances are rising. The percentage point spread, or differential, between Trump’s election probability and Biden’s is now 6.2 versus 7.6 on August 21. Trump promises lower personal and corporate taxes, earnings tailwinds. Many strategists say those changes can only be more incremental relative to the tax changes when he first entered office. But investors may also be fearful of a blue wave that could feature a large corporate tax increase. 

Here’s what Wall Street’s saying: 

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

"August was a strong month for stocks. The S&P 500 returned 7%, its best August in 34 years. It has also now recorded a streak of five consecutive monthly gains, something which last happened in early 2018. The index finished August just fractionally below the month's new record high. Much of the 56% rally from its March lows have been driven by the FAAMNG stocks, although last week even the index ex-FAAMNG entered positive territory for the year. Stocks remain supported by Fed liquidity. Research shows that entering the market all at once has historically offered the best outcomes—even at record highs, where subsequent 12-month returns have averaged 12% since 1960. 

Lauren Goodwin, Economist, Multi-Asset Portfolio Strategist, New York Life Investments: 

"Of the factors at play in this election, taxes are likely to receive the most policy attention. Taxes impact companies’ profitability, as well as spending on activities such as labor or capital expenditure, making them important for investors’ allocation decisions. By the same token, higher individual tax rates and capital gains rates may prompt changes in individual investment decisions, particularly among higher earners. Headline risk is therefore substantial. Fears of pre-emptive selling and a desire to front-run tax changes will likely trigger market volatility as the likelihood of a democratic sweep increases. This could especially affect the stocks which have seen the sharpest capital gains in recent years, which means large-cap technology and communications stocks may be disproportionately affected."

Michael Walkley, Apple Analyst, Canaccord Genuity: 

“Despite challenging global economic conditions due to COVID-19, Apple is demonstrating the strength of its products and ecosystem as evidenced by its strong third quarter results wit a return to year-over-year growth for iPhones and strong double-digit growth for macs and iPads due to the increased remote working and leaning. We anticipate continued double-digit growth for all hardware products except iPhones during the fourth quarter and tis is due to new iPhones slightly delayed and facing a difficult growth comparable. Starting in the first quarter of 2021, we believe Apple is well positioned to benefit from the 5G upgrade cycling anticipate strong iPhone growth trends as 5G smartphones ramp and Apple continues to grow its installed base and higher margin services revenue. We… increase our price target to $145 based on our introduced calendar year 2022 estimates [earnings per share: $4.8].” 

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

"Wave 15 of our survey of 2000 US consumers shows that a majority of respondents are likely to take an FDA approved vaccine, but it will take more time to build comfort re-entering public gatherings. We also note a slight turn lower in the percentage of people working from home.” 

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