Major U.S. indices were mixed Monday, as optimism surrounding re-openings kept the market afloat. Still, many on Wall Street are cautious, as risks mount against stretched valuations. Secondarily, many are concerned that the heavy monetary and fiscal stimulus recently deployed will accentuate consumer demand, which could spark high inflation and a spike in interest rates, driving stocks lower.
The S&P 500 rose 0.01%, while the tech-heavy Nasdaq rose 0.78% and the Dow Jones Industrial Average fell 0.45%. The 10-year treasury yield rose to 0.72%, a risk-on signal.
Driving some stocks higher was continued optimism about the easing of social distancing regulations around the globe, including in China, where Disney (DIS) - Get Report reopened theme parks and saw sell-outs almost immediately. Still, the stock fell 1.27%, as question marks on the company’s many U.S. businesses remain.
Importantly, Facebook (FB) - Get Report, Amazon (AMZN) - Get Report, Netflix (NFLX) - Get Report, Google (GOOGL) - Get Report, and Microsoft (MSFT) - Get Report, which account for more than 20% of the S&P 500’s market capitalization, rose between 0.4% and 1.6%, providing major support to the indices. Investors like to rush into big tech during times of heightened uncertainty, as these companies’ various secular growth trends partially enable them to grow earnings at a premium rate, even through a recession.
With low interest rates driving a high premium investors are willing to pay for stocks, many on Wall Street highlight that risk to 2021 earnings estimates remains.
Here’s what Wall Street had to say:
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
"The transition to the next phase of reopening may trigger a sizable rebound in consumer spending. Keep an eye on timely indicators for signs of economic progress amid reopening efforts.”
Mike Loewengart, Head, Investment Strategy, E*trade:
"The stock market has mostly experienced a V-shaped recovery up until this point, driven by massive stimulus efforts and, perhaps, wishful thinking. The reality is the economy is not experiencing the V-shaped recovery some economists were anticipating at the outset of the quarantine. In fact, economic data points to a U-shaped recovery with no clear indication yet of how deep and wide it will be. As investors are forced to read the tea leaves of a market that seems bent on marching higher and an economy struggling under the weight of a global pandemic, they should proceed with caution as we slowly assess the ongoing uncertainty in the current landscape.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“We believe the messaging from both the stock market and credit markets is the economy may be slower to recover than expected, which suggests the backend loaded $128 may be too high, so we are re-initiating our 2020 estimate at $125 per share. We are in uncharted territory relative to understanding the impact of shutting down a levered economy and believe until there is a vaccine, any reopening could be subpar, so we are using a 20% growth rate on our 2020 estimate that translates to $150 per share [consensus: $166].”
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
“Last week’s momentum reversal may be a sign of more pain to come. Bottom line we continue to think the S&P 500 will be contained by its 200-day moving average (2,990) on the upside and its 200 week moving average on the downside (2,650) in the near-term as it consolidates the initial move higher in this new cyclical bull market.”
Solita Marcelli, Deputy Head of Chief Investment Office, Americas, UBS:
"As markets start to increasingly price in a scenario of returning to economic normalcy, a lot of investors are looking at what all the unprecedented stimulus measures mean in the long run for indebtedness and inflation. Ballooning of government deficits coupled with central banks’ asset purchases make all of us question the future of macroeconomic policy in the developed world. Whereas some look for clear-cut answers on what these mean, we believe the interplay between central bank money supply, increasing government deficits, and other secular forces is a complex one.”