The more things change, the more they stay the same. The S&P 500 Index and Nasdaq both closed at new all-time highs on Friday, but tech had another great week, up more than 3%. For the week, tech, communications, and consumer discretionary all gained more than 1.5%, while energy and financials both fell significantly, 5.6% and 3.5% respectively. Every FAANG stock (Facebook, Amazon, Apple, Netflix, and Alphabet) gained more than 2% on the week, with Apple (AAPL) becoming the first company to ever crack the $2 trillion market cap. Large cap growth gained more than 3%, while small cap value lost more than 3%. If this all sounds familiar it is because it has been happening all year. The high flying growth areas continue to benefit from the current environment, while value has struggled. We maintain a growth tilt and expect this outperformance to continue the rest of 2020.
Going for 5 in a row. The S&P 500 gained for the 4th consecutive week last week, the first four-week win streak since a five-week win streak in late 2019. What could drive stocks this week? All eyes will be on the Republican convention, with little progress expected on the next COVID-19 fiscal plan. US and China relations remain icy, so that’s another wild card to watch. On the economic front, it is a light week, as earnings season is wrapped up, with consumer confidence, weekly initial claims, and personal consumption and income the big data points.
Election coming into focus. With the Democratic convention behind us and the Republican convention starting Monday, we look at the market upside and risks of a Biden and Trump victory in November in this week’s and next week’s Weekly Market Commentary, respectively. Markets and the economy have historically shown no real preference for one party or the other in the White House, and we continue to believe broad economic forces outweigh policy. We do, however, see some modest downside market risk for a Biden presidency around corporate taxes and regulation, particularly for financials and in the energy sector. At the same time, trade policy under Biden may be incrementally more pro-growth, the odds of an infrastructure bill may increase, and risks to central bank independence may decline. For more analysis of our outlook for a Biden presidency, see this week’s Weekly Market Commentary: Election Preview Part 1: A Biden Presidency—Upside and Risks, and next week look for our follow-up discussion of the potential market impact of President Trump winning re-election in November.
Technical update. The S&P 500 set another all-time high on Friday, as minor breadth divergences at the securities level don’t appear to be phasing investors, while looking under the hood at the industry level suggests a continued push toward cyclical leadership. Equal-weighted consumer discretionary vs. consumer staples is on the cusp of fresh relative highs, while industrials continue to outperform. Despite this, it would not come as a surprise to see the market take a breather and consolidate the recent leg higher. We reiterate our view of support at the 3150—3200 range as the level to watch for the S&P 500 in the event markets take a pause.
COVID-19 news. New cases continued to trend lower over the weekend, averaging a 15% week-over-week decline for the past three days, bringing the decline in the seven-day average to more than 17%. Hospitalizations fell 11.4% compared with the prior week, the biggest week-over-week decline since June 5 (source: COVID Tracking Project). The Food and Drug Administration (FDA) will grant emergency use authorization (EUA) of convalescent plasma as a coronavirus treatment. The White House is considering fast-tracking the vaccine being developed by Oxford University and AstraZeneca for use ahead of the November election.
Earnings season wraps up. With less than 20 S&P 500 companies left to report results, S&P 500 earnings for the second quarter are tracking to a 32% year-over-year decline, an impressive 13 percentage points above estimates when earnings season began. Healthcare, technology, and utilities, have produced positive earnings growth, while the entire earnings decline has been driven by four sectors (consumer discretionary, energy, financials, and industrials). The earnings beat rate (82%) and average positive surprise (23%) are the highest since FactSet began tracking these statistics in 2008. Forward 12 months’ estimates have risen 1.5% since July 1, an indication that second-half estimates may be too low.
Jackson Hole on tap. This week’s economic calendar includes data on housing, durable goods, and consumer sentiment, while the Federal Reserve’s (Fed) annual monetary policy gathering will take place virtually on Thursday and Friday. Chairman Jay Powell is expected to discuss the Fed’s monetary policy framework review.
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