A Record Breaking Earnings Season | Daily Market Update

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Tuesday, May 11, 2021

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A Record Breaking Earnings Season

On the LPL Market Signals podcast, Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss the incredible earnings season, debate whether we’ve hit a peak in earnings and economic growth, and economic policies.

Daily Insights

Markets pull back amid potential inflation and supply constraints as the economy reopens

  • Tech names retreat again as the Nasdaq Composite points to a lower open after Monday’s 2.5% decline, its largest decline since March.
  • European markets are weak as the Euro Stoxx 50 is down over 2% during midday trading.
  • Asian equities were mostly lower after U.S. tech names sold off. China’s markets finished marginally higher on better than expected inflation data.

Measuring inflation and the Fed’s reaction to higher prices

  • Inflation is one of the primary risks to bondholders. Rising consumer prices erode the “real” value of principal and interest payments making them worth less.
  • There are two main indexes used to measure inflation—the Consumer Price Index (CPI) and the Personal Consumption Expenditure Index (PCE), which is the Federal Reserve’s (Fed) preferred index.
  • Due to the differences between the two indexes, core PCE has generally been 0.25% lower than core CPI, on average.
  • The main reason core inflation levels have been below 2% has been the consistently lower prices within the goods sector. That would likely need to reverse to see sustained inflation over 2%.
  • While there is a risk to the Fed’s patient approach, our base case is that most of the inflation we’re likely to see this year will be transitory and the Fed can take its time before normalizing monetary policy.
  • For more on our views on measuring inflation and the Fed’s reaction to higher consumer prices, see today’s LPL Research blog, available at 12p.m. ET.

Value run looks increasingly durable as the re-opening trade becomes the inflation trade

  • Value style stocks benefitted from upside surprises to economic growth and the pace of vaccine distribution.
  • Inflation risk is giving value stocks a second wind due to its potential impact on rates and commodity prices, while also reflecting the impact of supply chain disruptions.
  • While there are still long-term themes supporting fundamentals for growth stocks, near-term risks favor value, which may benefit until there is greater clarity on whether the upcoming period of higher inflation is, in fact, transitory.

Beware “base effects” in Wednesday’s Consumer Price Index (CPI) data

  • A lot of attention may be given to a jump in year-over-year inflation in Wednesday’s CPI data, but much of that is due to rolling off last year’s deflationary period, sometimes called “base effects.”
  • Month-over-month numbers will be more important, but any meaningful upside surprise to expectations may have a market impact.
  • The median estimate of Bloomberg-surveyed economists is for headline CPI to run 0.2% month over month, but to jump from 2.6% to 3.6% year over year.

Technical update

Inflation fears punished stocks Monday as 5-year breakevens hit their highest level since 2006. The Nasdaq and technology led the sell-off, but losses spilled into the broader market later in the day. The Nasdaq looks set to extend losses after closing below its 100-day moving average on Monday; next support for the index can be found near 12,400.

Amazing Earnings Season: LPL Research Reacts

LPL Research raises its year-end S&P 500 Index fair value target range again in the wake of a stunning Q1 2021 earnings season. Learn more in this week’s Weekly Market Commentary.

 

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