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What’s Driving Stocks Higher and What to Watch

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U.S. stocks finally began ticking higher after an ugly week of selling related to the economic impact of the coronavirus. The market is now pricing in more interest rate cuts from the Federal Reserve, while analysts search for lowered earnings estimates.

All three major U.S. indexes were higher Monday, with the S&P 500 gaining 0.79%. The tech-heavy Nasdaq lead the gains, with more than a 1% gain. Heavily sold-off large-cap tech rebounded, lead by Apple  (AAPL)  and Microsoft  (MSFT) , up 3.50% and 2.16%, respectively.

The move up in stocks was accompanied by a move up in bond prices as well, which sent the 10-year treasury yield down to 1.09%. 

The 2-year yield fell to 0.81%, below the Federal funds rate of 1.5%, which is historically an indicator of more Fed rate cuts in the near-term. The 2-year should have a positive spread over the Fed funds rate when investors do not expect a cut. The market is currently pricing in a 100% chance of a rate cut in March, according to data from CME Group.

Meanwhile, valuations have plummeted, with the average stock on the S&P 500 trading at a multiple of 16.6 on earnings for the next 12 months. But the consensus EPS expectation for 2020 of $178 is bound to fall. Many U.S. companies have issued wider-than-usual revenue guidance ranges for full year 2020, but have said it is difficult to understand the impact of the coronavirus.

Several analysts have said that they expect companies across their respective industries to cut revenue and earnings for the year.

NXP Semiconductor  (NXPI)  cut its first quarter revenue estimate by 4% to $2.15 billion. Alliance Bernstein semiconductor analyst Stacy Rasgon wrote in a Sunday evening note that he expects the company to lower EPS estimates for the full year by roughly 12%, while the chip makers are expected to lower numbers as well.

Banks have sold off, with Citigroup  (C)  down the worst of the large banks, at a 22% year-to-date decline. Goldman Sachs GS analyst Richard Ramadan says lower interest rates, lower loan volumes and lowered 2020 EPS of more than 5% for large banks has been priced in, as banks trade at historically cheap valuations again.

Although estimates earnings are bound to come down, most strategists and even stock analyst think stocks are too cheap, especially compared to interest rates. 

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