After reaching all-time highs earlier in the week, large-cap indexes came under pressure ending the week with marginal losses. In contrast, mid and small-cap indices regained leadership after falling behind large caps for several weeks. Corporate earnings, a Fed meeting, economic data and re-masking of America played on investor sentiment.
The S&P TSX gained 0.71% basis points, followed by the Russell 2000 adding 0.74% basis points, and the S&P400Mid-Cap index jumped 1.16%. The S&P500 and the Dow lost 0.37% and 0.36%, respectively, and the Nasdaq was the big loser of the week, dropping 1.11%. In Europe, the equity markets closed mixed on the week as investor optimism over earnings was overshadowed by concerns of the spread of the delta variant. Germany’s DAX index fell 80 basis points, the French CAC 40 gained 0.67%, UK’s FTSE index was flat, and Italy’s MIB Index gained 0.95.
With 59% of the S&P500 companies reporting, 88% are beating consensus earnings estimates by an average of 17.2%, beating the five-year earnings average of 7.8%. Financials, information technology, and communications services are leading sectors with the most significant contribution to the total increase in earnings. Corporate revenue increases are reported by 88% of the reporting companies, with an average increase of 4.5% above estimates. The average five-year revenue beat is 1.2%. To date, year-over-year growth of revenues exceeds 23%, which is the highest growth rate in earnings for the S&P500 since FactSet began reporting this statistic in 2008. Communication services, energy, financials, and information technology were the largest contributors to the increase in revenues in the quarter to date. Expectations are the continued double-digit growth for the remainder of the year.1
Durable goods orders rose 0.8% but fell short of the previous month’s revised number of 3.2% from 2.3%, and economist’s forecasts polled by the Wall Street Journal expecting 2%. Labor and supply shortages continue to plague manufacturing and are expected to persist to the end of the year, potentially slowing growth. Supply shortages are a major contributing factor to the recent spike in inflation.2 On Tuesday, The Conference Board reported the Consumer Confidence Index was relatively unchanged from June, rising 0.2 to 129.1. Consumer optimism about the short-term outlook for jobs, personal finances, and business conditions eased but remain high. 3 In a statement on Wednesday by The US Federal Reserve, Chairman Powell indicated business conditions, while still below target, made progress. Further, he signaled that the committee would continue to monitor progress and begin considering scaling back on asset purchases. Still, he gave no firm timeline as to when the tapering might occur.4 On Thursday, the Labor Department reported jobless claims at 400,000, falling 24,000 from the previous week. Continuing claims for all programs rose 582,403 from the previous week to 13,156,252.5 Also, on Thursday, the Commerce Department released the latest GDP jumping 6.5% annual rate in the second quarter but far behind economists forecast of 8.5%. The major detractors to the reduced rate were decreases in private inventory investment, residential fixed investment and federal government spending.6
With supply and labor shortages holding back the economy, another worry confronting investors in North America and Europe is the possible impact of the delta variant on the economy. Already we are witnessing country-wide protests against a vaccine passport in France. It appears, at least in France, little thought is being given to the repercussions of a major cohort of society being forced to stay at home, not to mention the cost of protesting. There is a probability of more restrictions in the US and Canada if the delta variant infections continue to rise. The civil unrest in several European countries and Australia over more severe restrictions and limits on societal participation is likely to spread unless clearer heads prevail. Additional lockdowns could become economically and socially devastating if allowed to continue for an extended period. The re-introduction of restrictions on business would undoubtedly expose the economy to a possible recession in 2022.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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