US stocks appear to have started on Monday in the last few weeks ahead of key inflation data and earnings reports later in the week.
Fears about rising COVID-19 cases and vaccination problems, after a Chinese government official said the effectiveness of their vaccines was low, have put pressure on equity markets.
However, the partial reopening of the UK and the optimistic comments of Federal Reserve Chairman Jerome Powell provided some positivity. Investors will also expect consumer price data on Tuesday and profits from major banks JPMorgan Chase, Goldman Sachs and Wells Fargo later this week.
After a delay on Friday, the U.S. Department of Labor said the producer price index, a key measure of inflation, rose 1% in March, the largest annual increase since 2011.
In ours call of the day, Goldman Sachs strategists said there was higher inflation in the coming months, which could boost companies with high price power.
“Don’t fight the Fed” is a phrase investors have learned to ignore because of its danger. What the central bank wants is usually what it gets, sooner or later, “said the strategists, who noted that the Fed’s intervention a year ago caused the 80% concentration that the S&P 500 has raised. SPX,
to the all-time high. The index has risen 10% to date and is now trading at Goldman’s target of 4,100 by mid-year – the bank’s target at the end of the year implies a 5% gain.
The Fed now wants higher inflation, they said. The investment bank’s economic team expected inflation readings to rise in the coming months, peaking at 2.3% in April, before hovering below 2% by 2023.
When it comes to the impact on stocks, Goldman said it was margins, adding that some companies protected margins by passing higher costs on to their consumers.
Strategists, led by David Kostin, said companies with little price power have historically outperformed when the S&P 500 profit margins are expanding. In contrast, companies with high pricing power have “lagged sharply” over the past year. However, rising inflation may mean it is about to change and firms with high pricing power will benefit, strategists said.
Goldman examined stocks with high price power: high and stable gross margins relative to industry peers. The screen produced 55 shares, including video game company Activision Blizzard ATVI,
tobacco giant Philip Morris PM,
consumer goods companies Colgate-Palmolive CL,
and Procter & Gamble PG,
and drug manufacturer Zoetis ZTS,
Technology companies, such as Aspen Technology AZPN,
Adobe ADBE,
and Oracle ORCL,
and retailers Etsy ETSY,
and Dollar General DG,
also appears.
Aside from the start of first-quarter earnings seasons next week, Goldman expected aggregate sales growth of 5% and earnings per share (EPS) of 19%. But that won’t matter much, their strategists added. “The trajectory of the economic recovery will continue to make retrospective metrics less relevant to the prospective market,” they said.
The next number that will dominate investor discussions is President Joe Biden’s plan to raise the corporation tax to 28%, Goldman said. The full adoption of Biden’s proposals would see as a consequence that by 2022 the S&P 500 EPS would grow annually, from 12% to 5%, they added.
The tweet
According to this chart from Jeroen Blokland, senior portfolio manager at Robeco Asset Management, higher producer prices are positively related to S&P 500 earnings.
The markets
US stock futures ES00,
NQ00,
pointed rather lower on Monday, with Dow YM00 futures,
implying a 40-point loss for the Dow Jones Industrial Average DJIA,
in the open. European stocks also fell sharply during early trading, while Asian markets fell overnight as investors controlled rising coronavirus cases and slow vaccination deployments.
The buzz
Powell said it will “be a while” before the central bank hits the brake on the economy, in an interview “60 Minutes” on Sunday.
Technical giant Microsoft MSFT,
is in advanced talks to buy the voice recognition company Nuance Communications NUAN,
in a deal valued at about $ 16 billion, according to several reports Sunday.
Pub gardens, hairdressing salons, gyms and non-essential shops will open on Monday for the first time in England since early January, as the UK takes the next step in opening them.
Alibaba 9988,
shares rose 7% in Hong Kong trade after the e-commerce giant received a record $ 2.8 billion fine. The company’s American revenue receives BABA,
they were over 6% more in the premarket trade.
Italian diagnostic specialist DiaSorin DIA,
announced an agreement to purchase test kit manufacturer COVID-19 Luminex Corp. LMNX,
for about $ 1.8 billion.
Random readings
Drinkers face the cold to paint midnight as England’s pubs reopen.
Yuh-Jung Youn, winner of Bafta’s Best Supporting Actress, calls the British “snobbery.”
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