The S&P 500 continued its grind higher this week and is now up roughly 14% on the year. It was a relatively quiet week as we get set for a large slate of earnings reports to come over the next few weeks. Banks kicked off the earnings season with solid reports, but market reaction was generally mixed. As an early bellwether, JP Morgan Chase posted earnings that easily beat estimates as they drained the loan loss reserves that had been built up in the middle of the pandemic. However, participants looked reluctant to push the price meaningfully higher. This could be an early signal that company strength in light of the pandemic has already been priced into the market to a great extent.
Leadership over the last few weeks has reverted back towards what worked in the earlier days of the pandemic. Growth names have continued to reassert themselves. This change coincides with a pause in the ascent of interest rates. Since the start of April, the 10-year treasury yield has come in by roughly 20 basis points and now sits at 1.57%. Over that time frame, tax increase proposals have been floated, and virus numbers have turned higher once again. Both of these could be dampening the inflation expectations that were building sharply in the early part of the year. Foreign yields have also stayed quite low considering the lag between foreign and US efforts in rolling out the vaccine. This should keep a lid on US rates to some degree.
We don't expect that cyclical stocks will meaningfully deteriorate from here; rather, we think that sentiment on many of the growth names had been overly negative. Going forward, there is room for names in both groups to participate. As we move into earnings season, we could very well start to see lower correlation between stocks in general. Company reports hopefully will start to shed light on who is winning and who is losing, and positioning can start to adjust accordingly.
Preston May, CBE®
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