With the emergence of the delta variant, coronavirus case counts are trending higher in the U.S. and other parts of the world, leading to another round of mask mandates and, in some instances, heightened travel protocols and warnings.
Even with that, equities continue grinding higher. For the month ending July 26, the S&P 500 is up 3.74%, and several major domestic equity gauges reside near all-time highs. Suffice to say, the delta variant is preventing investors from embracing equities.
“The media’s attention is focused on a surge in COVID-19 cases, including so-called ‘breakthrough cases’ among the vaccinated, with discussions of global shutdowns and the return of mask mandates,” writes Nationwide’s Mark Hackett. “Investors are showing little reaction, betting that the appetite for renewed shutdowns is low and focused on the fact that cases, hospitalizations, and deaths are a fraction of the January peak.”
Whether it’s increasingly sturdy balance sheets, dividend growth, or plans for more share repurchases, an array of factors speak to sound fundamentals with stocks, and with interest rates low, many investors feel as though equities are worth the risk even against the backdrop of rising COVID-19 cases.
“Strong earnings calls, aggressive share buybacks, accelerating M&A activity and a record IPO environment supports the bull case and makes it very difficult to short the market, though this behavior is more associated with late-cycle behavior than early cycle,” adds Hackett. “Despite strong index moves, sentiment and momentum indicators reflect heightened caution. Investors have returned to their ‘comfort blanket,’ with large-cap technology leading the way.”
Tech’s recent resurgence could be imminently tested among a slew of marquee earnings reports from the group this week. The sector’s importance to the health of the broader market is not up for debate as it’s the largest sector allocation in the S&P 500. This week, Apple, Microsoft, Amazon, Alphabet (Google), and Facebook, among others, step into the earnings confessional. As Hackett notes, this earnings season has been a case of so far, so good.
“One-quarter of the S&P 500® Index companies have reported, with 88% reporting earnings upside and 86% with better-than-expected sales,” he said. “Earnings growth is on pace to be up 74%, the best since the emergence from the financial crisis. Companies that beat earnings are seeing a near-1% price boost, in line with the five-year average.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.