Risk Sentiment Muted, Investors Vigilant: What Wall Street’s Saying

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Stocks rose gently Friday and have been largely flat for almost a month. Wall Street notes the positives that drove weekly gains, but points out that the market is awaiting several key developments in the short-term. 

The S&P 500 rose 0.24%. The Dow Jones Industrial Average fell 0.04%, driven by heavier losses in cyclical stocks like oil and industrials. The safe 10-Year Treasury bond saw its yield fall to 0.66%, a slight risk-off signal. Gold, another safe haven asset, rose 0.74%. Crude oil fell 1.27% to $33.49 a barrel. 

Investors are still favoring growth stocks over value, as they're cautious about the speed of an economic recovery. Many growth stocks have secular revenue drivers that can often overpower cyclical headwinds to the economy, like weak consumer spending. The Vanguard S&P 500 Value etf  (VOOV) - Get Report fell 0.09%, while its growth counterpart  (VOOG) - Get Report rose 0.31%.  

Growth stock Nvidia  (NVDA) - Get Report, for example, had earnings Thursday afternoon and saw its stock rise 2.86% Friday. Data center revenue grew 80%, helping the company handily beat revenue and earnings estimates, as the work-from-home environment drives accelerated cloud adoption. Nvidia’s multiple on 2020 earnings estimates has expanded to roughly 45 times, against a five-year historical average of just above 30 times. The recent valuation is one that Alliance Bernstein analyst Stacy Rasgon tells TheStreet is close to justified. "There’s no reason why the multiple can’t keep up here,” he said. 

For the broader market, many say the Federal Reserve's reassurance of stimulus on its minutes supported sentiment this week. Investors, while wary of the speed of a recovery, are comforted that monetary and fiscal stimulus measures won’t let the economy tank, even if it’s in a deep recession. 

Risks to market are pronounced. Reopening could prove premature, leading to a re-spike in virus cases and more lockdowns. Vaccine delays would be a negative. The U.S. and China are on worsening terms, threatening a trade deal. 

Meanwhile, valuations are full at 24 times 2020 earnings on the S&P 500, extremely high historically. Since late April, the index is largely flat.  

But broadly, if some of the optimism continues, valuations could conceivably go higher, as the spread between 2020 earnings yield on the S&P 500 and safe 10-Year Treasury yield — or equity risk premium — is 4.2%. Historically, a healthy environment supports a risk premium of 3.5%. 

Here’s what Wall Street’s saying

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

"After a strong rally from the March lows, equity markets have been range-bound. Investors are weighing hopes of a recovery against fears of a “second wave” of virus cases, high valuations, and US-China trade tensions. In our view, for markets to catch a “second wind,” investors need greater confidence that a “second wave” of virus infections will not lead to renewed lockdowns. Even if current economic conditions are weak, markets are forward-looking and would likely trade higher if investors gain confidence that a robust recovery will take hold. We expect [trade] rhetoric [on China] to contribute to some market volatility. But we think it is unlikely that this will translate into serious concrete actions, such as new tariffs, especially given both the US and China are trying to recover from deep economic slowdowns and prevent a sustained increased in unemployment."

Scott Knapp, Chief Market Strategist, CUNA Mutual Group:

"This week, we’re getting a really interesting look at the sizable role that psychology is playing in market performance, and how the chain reaction from this psychology is building a self-fulfilling uptick mechanism. Signals build confidence, and confidence triggers more positive behavior from investors, which can ultimately help finesse the economy into a better place over time. It’s apparent that this psychology is in the driver’s seat because the data still isn’t showing us that we’re out of the woods – or even at the edge of the woods – with this public health crisis."

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

“Our survey of 2,000 US consumers shows the virus stable as a stop concern — cited by two-thirds of consumers. 12% of consumers said they ate out at a restaurant (skewing to states that are reopened) compared to 6% two weeks ago. Consumers are more open to non-flight traveling (car, train, etc.) within the U.S. than taking cruises, traveling abroad or flying within the country.” 

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