Earnings Indicate the Way Forward for Stocks is Up | Daily Market Update

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Tuesday, April 20, 2021

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Some Pros and Cons

In the latest LPL Market Signals, LPL Research Chief Market Strategist Ryan Detrick discusses some potential worries, while also showing why any weakness could indeed be a buy the dip opportunity, as many rare signals are flashing from a longer-term perspective which should lead to eventual higher prices. Lastly, it is Earth Day this week, so Ryan discusses the impacts of that and Sustainable Investing with LPL Research Head of Sustainable Investing, Jason Hoody.

Daily Insights

U.S. stocks open modestly lower as concerns over rising cases around the world will hinder the travel industry

  • European markets are under pressure in midday trading as investors assess extended positioning.
  • Asian stocks finished mixed overnight with Japan a big underperformer.
  • West Texas Intermediate (WTI) crude oil traded above $64 a barrel on the anniversary of the negative pricing event in 2020.

Valuations matter in the bond market too

  • We use market-based metrics like Yield-to-Worst and Option-Adjusted-Spread to determine valuations in the bond market.
  • Current yield-to-worst metrics are low but rising so future expected returns are improving.
  • Option-Adjusted-Spread metrics, which represent the compensation for holding riskier debt, remain low so it may not be worth it to take on additional credit risk.
  • Given very low starting yield levels and stretched valuations, investors should expect low fixed income returns.
  • For more of our analysis on the valuations within fixed income markets see today’s LPL Research blog, available at 12p.m. ET.

S&P 500 Index earnings tracking to a more than 30% year-over-year increase in the first quarter

  • With just 43 S&P 500 Index companies having reported, first quarter earnings are already tracking 6 percentage points above March 31 estimates at 24%.
  • Track first quarter earnings results on the weekly LPL Research Earnings Season Dashboard (see below).

View enlarged chart.

Taxes, variants, cost pressures, sentiment point to consolidation but earnings still say way forward for stocks is up

  • With a lot of good news priced-in, even smaller catalysts can extend a period of market consolidation and we have several.
  • Higher taxes on corporations and high-income earners are likely on the way. COVID-19 variants are slowing the path to a global recovery, and inflation remains a worry, which could impact corporate margins—and sentiment may have gotten ahead of itself.
  • The most important market fundamental, however, remains corporate earnings, which will likely continue to support stock market gains, even if it’s not a straight path.

Technical update

The consumer discretionary and technology sectors led stocks to the downside on Monday, and that momentum is continuing today. First support for the S&P 500 Index can be found near 4000.

Peak Optimism?

While optimism surrounding the reopening is certainly understandable, LPL Research takes a look to see if sentiment is flashing a near-term contrarian warning sign for stocks. Learn more in this week’s Weekly Market Commentary.

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