Is the Equities Market Ready to Wind Down?

The S&P 500 has notched a solid performance, but with earnings season winding down and the chance for more summer lethargy to set in, market participants may be pondering what the next sparks are for equities.

They’re right to ponder what’s next. After all, the S&P 500 is higher by 17% year-to-date – an impressive showing when considering the laggard status of growth stocks, volatility in Treasury yields. and the ongoing persistent vs. transitory inflation debate. And with the coronavirus delta variant commanding more and more daily headlines, the near-term climate could be right for an equity pause.

“Equity markets have paused, with the S&P 500® Index fractionally lower in two of the past three weeks on Delta variant concerns and elevated valuations,” says Nationwide’s Mark Hackett. “Earnings season is largely over, and the FOMC meeting and GDP behind us, markets enter a difficult seasonal period with few catalysts to drive markets higher.”

As Hackett notes, the S&P 500 is a on six-month winning streak. Seasonality, however, could try that streak. Historically speaking, the August through October stretch is the worst three-month period of the year in which to be long stocks. Of course, history isn’t guaranteed to repeat, but there are some potential headwinds looming, and they could rear their heads as soon as this month.

“Market movers for August are going to be Covid-19 news and debt ceiling brinksmanship, both of which are likely to unsettle investors,” according to Hackett. “In the face of these headwinds, expect equities to grow into their valuations over the next couple weeks.”

On the bright side for equity bulls, 10-year Treasury yields are low and the yield curve is flat, indicating investors may have little incentive to embrace conservative debt. Additionally, earnings growth estimates are trending higher and that could be supportive of broader market upside.

“Forward estimates are trending higher, with 25% growth now expected in the third quarter and 21% for the fourth quarter, resulting in greater than 40% growth for the year,” concludes Nationwide’s Hackett. “Estimates for 2022 are moving higher at a slower rate, and as a result, growth is now forecast at less than 10%. Continued upside to estimates is critical given that the S&P 500 trades at over 20x the current 2022 forecast.”

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