Stocks Rise on China Trade Optimism: What Wall Street’s Saying

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Stocks rose Tuesday on U.S.-China trade deal optimism. However, Wall Street is flagging that risks to stocks are seen in coronavirus and lockdown trends as well as uncertainty over who will win in the November election.

All three major U.S. indices rose Tuesday, with the S&P 500 up 0.43%. The 10-Year Treasury yield rose to 0.72%. Yields rise when prices fall. 

Monday night, S&P 500 futures were down 1.3% until Trump tweeted: "The China Trade Deal is fully intact. Hopefully they will continue to live up to the terms of the Agreement!” 

Stocks sensitive to economic changes participated in the rally. The S&P 500 Equal Weight Consumer Discretionary Index rose 1%, while the Russell 3,000, a small cap index, rose 0.41%. Banking ETF  (KBWB) - Get Report rose 0.4%. 

But the rally was really lead by tech stocks, which have a large market cap weighting in the S&P 500 and power through cyclical headwinds, prompting investors to favor them when uncertainty takes hold. The tech-heavy Nasdaq rose 0.74%. 

Apple  (AAPL) - Get Report rose more than 2% for the second consecutive day. Analysts this week have moved 5G unit sales estimates and price targets up, seeing strong consumer demand as manufacturing and demand rebounds as reopenings continue. Plus, Apple said it will be in-sourcing chips for Macs, bringing costs down, which is meaningfully accretive to earnings. 

For most of June, stocks have been on pause, with the S&P 500 largely flat in the past 20 days. And the 10-Year Treasury yield is down almost 20 basis points in that span. While stocks have been stuck, earnings estimates on a rolling forward 12-month’s basis have increased, bringing the average earnings multiple on the S&P 500 down a bit. 

Stocks are looking incrementally more attractive versus interest rates, compared to a few weeks ago, although they’re still priced fairly optimistically, compared to their historical correlation to rates.

The stagnant market has been led by value stocks, many of which are cyclical. The Vanguard S&P 500 Value ETF  (VOOV) - Get Report is flat for the entire mont of June, while the growth counterpart to that fund  (VOOG) - Get Report is up 4.4%. 

Here’s what Wall Street’s saying: 

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

"US-China trade rhetoric adds to volatility. Comments like Navarro’s could fuel concerns that President Trump might campaign and win on a renewed anti-China platform. Equally, the election has the potential to add volatility to markets if investors tell themselves another “fear” story—that a blue-wave Democratic victory leads to higher taxes, tighter regulation, and antitrust action against big tech. Our view is that the election is likely to be close. With the result highly uncertain, positioning for a particular election outcome is therefore inadvisable, and we recommend that investors look toward so-called "US Campaign Warriors" that are less exposed to shifts in public policy discussions.” 

Mike Loewengart, Head, Investment Strategy, E*Trade:

"Covid has disproportionately affected major S&P 500 sectors, which accounts for why we’re seeing some indexes hit new highs while others flounder—Consumer discretionary got hammered and energy has experienced a whirlwind of volatility, but tech has had a relatively easier road over the past few months as stay-at-home stocks become the latest investing trend. As some of the most deeply affected states and cities embark on reopening, this could leave techwatchers wondering what the future holds for these stay-at-home tickers. The good news is: There is still a lot to like with this sector. First, fundamentals for many of these names remain strong, especially in light of the recent valuations we’re seeing in these typically pricey names. Also, companies like Apple and Microsoft made recent announcements of new product rollouts. With in-person office environments mostly touch and go, we could be seeing some excitement around new hardware and gadgets to make working from home a bit easier—potentially putting some momentum in this sector.” 

Lori Calvasina, Head, U.S. Equity Strategy, RBC Capital Markets:

"Equity markets look expensive again on 2020 and 2021 EPS, using both our own forecasts and the current bottom up sell side consensus estimates. At recent highs, the S&P 500 has been trading at 26x on current year P/E and 20-21x on next year P/E. At the March 23 rd low, the S&P 500 was trading near average on current year P/E and trading near the lows seen during the 2018 Growth Scare and 2015-2016 Industrial Recession on next year P/E. While it’s fair to say a valuation opportunity briefly emerged at the March 23 rd low based on our next year P/E analysis, it evaporated quickly. While we acknowledge that Fed stimulus has inflated P/E’s and is likely to continue supporting lofty levels, the expansion al ready seen is on par with what we’ve seen in most of the prior QE periods. Stocks look attractive vs. bonds when we compare earnings yield to the 10-year Treasury. The attractiveness of equities relative to bonds is a little below its post Financial Crisis average.” 

Tony Dwyer, Chief Market Strategist, Canaccord Genuity:

"The historic Fed action has caused an incredible response in 1) Money Supply (M2); 2) Real Liquidity; 3) a record 33% Personal Savings Rate that is more than double any prior peak; and 4) a very quick reversal in tightening financial conditions. Typically, trouble in the market comes from when companies or households need money and do not have access to it – clearly, that is not the case in the current environment.” 

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