The Dow and S&P500 pushed further into all-time highs on Friday as investors believe strong growth is coming on the back of more stimulus and a successful vaccine rollout. US reporting will be in focus this week as investors expect to see quarterly growth improve as the US economy continues to slowly reopen.
The buying in the US is not just isolated to either Value or Growth anymore. With the volatility in the Bond space easing, investors are feeling much more confidant once more. Therefore, we are seeing buying across sectors that are likely to benefit from the economy reopening the recent Covid Stimulus. Not to mention the next round of fiscal stimulus that is on its way.
We are starting to hear a little bit more noise around Biden’s Proposed Corporate tax increases, and global minimum tax. We will likely see many US investment banks start to release estimates on how much it will affect Corporate Profits and what effect it will have on US markets. The tax reductions passed in 2017 lifted earnings per share of S&P500 companies by 10 percent the following year, according to analysis in June 2020 by Goldman Sachs.
The Tech sector could be harder hit with the minimum global tax as they pay much less than many other companies in the S&P500. The S&P500 tax rate sits at 17.5 percent as of the third quarter of 2020, while that of the tech sector was just 14.8 percent, according to Howard Silverblatt at S&P Dow Jones Indices.
All in all, markets have everything they could want- Fiscal Stimulus from the US, extremely accommodative central banks, and the reinsurance that rates will stay low for a long time. It is a fine balancing act though, between Vaccines and Covid Cases, as well as stimulus vs the fears of inflation. We want to see the economy rebound, but even the slight hint of raising rates will cause a fear selling event.
The XJO is expected to rally on open this morning back towards the 7000 mark. This level seems to be the level our market is struggling to get through following the recent break of the post-pandemic high of roughly 6950.
The high of our market is roughly 7200, and with the recent renewed strength in world markets, led by the U.S, it looks like a reasonable target in the short to medium term. Be mindful though, the aggression of the recent rally may bring a retracement back to trend or consolidation, before reaching 7200. It will once more largely rely on how well the U.S performs.
In addition, the Materials have made up most of the falls they experienced through March, with their all-time high back in reach. The Financials are basically at their post pandemic highs. If both these sectors falter here, the strength in our market will be dampened. Metals remain strong though and the AUD remains relatively low – an accommodative environment for our miners to keep rising.
April is a cyclically strong month for our market, but we usually see a pullback in May – “stay away in May”.
US shares rose on Friday, with the S&P 500 index powering to fresh record highs. US shares are about to enter an earnings reporting season, which will kick off in earnest on Wednesday night Australian time, with several of the world’s largest banks reporting their first quarter results; as always, this reporting season has the potential to shift the current market movements. In economic reporting, we saw US producer prices (a measure of inflation) come in much stronger than expected for the month of March; we will see consumer price inflation data on Tuesday night Australian time.
Markets have been worried about rising inflation, which has pushed government bond yields higher. Should Tuesday’s consumer prices read come in strong, it will likely translate to further gains in government bond yields and potentially equity market volatility. Healthcare and Technology stocks were the strongest performers on Friday, while Oil & Gas was the weakest sector.
- Nasdaq pulls back, with selling in Tech, Discretionary, and Communication Services - May 5, 2021
- Markets continue to consolidate at top of the range - May 4, 2021
- US markets break higher again but with low momentum - April 30, 2021