Stocks Snap Back

U.S. equities rose Friday with the the major averages hitting new records as they overcame concerns about economic growth from earlier in the week.

The Dow closed above 35,000 for the first time ever, bringing its gain for 2021 to more than 14%. The blue chip average rose 238.20 points, or 0.68%, to 35,061.55, gaining for a fourth straight day. It made the 1,000-point trek rather quickly, having closed above 34,000 for the first time ever back in mid-April.

The S&P 500 gained 1.01% to 4,411.79 and the Nasdaq Composite climbed 1.04% to 14,836.99, both new closing highs for the benchmarks.

The 10-year Treasury yield bounced on Friday to 1.281%, easing concerns about the economy that the bond market triggered on Monday. The 10-year yield fell to a 5-month low of 1.13% earlier this week.

“The bond market has surprised everybody,” said Nick Frelinghuysen, a portfolio manager at Chilton Trust. “The strength of the rally is telling the equity market that what’s happening with inflation is probably an overshoot, that a lot of these things are not endemic and they’re not going to be things that we’ll have to live with like we did in the ’70s and ’80s.”

Strong earnings from tech stocks made investors optimistic ahead of reports next week from the biggest names in the sector. Twitter and Snap each jumped Thursday following better-than-expected second-quarter earnings reports. Twitter traded 3% higher, while Snap shot up 24%.

“The Snap and Twitter results are just a reflection that digital advertising spend is coming back with a vengeance,” Frelinghuysen said. “You’re seeing that ripple through into Google and Facebook.”

Facebook gained more than 5% on the results from its social media competitors. Alphabet added 3%. Both report next week along with Apple, Microsoft and Amazon.

All three U.S. stock averages closed the week in the green, rebounding from last week’s losses and Monday’s sharp sell-off. The Dow dropped more than 700 points to start the week as yields fell, unnerving equity investors about the economy.

The S&P 500 rose 2% for the week and the Nasdaq Composite added 2.8%. The Dow ended the week up 1%.

Strength in tech shares also comes with the continued spread of the highly contagious delta variant of Covid.

“We saw during the depths of the pandemic that tech stocks and their earnings held up the best, so I think a lot of investors are going back to the well, given we have a Covid resurgence,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said. “Long term interest rates coming down as much as they have also makes those stocks more attractive.”

The stock market overall has been bolstered by a strong earnings reporting season, with nearly a quarter of the S&P 500 having already reported. Of those companies, 88% have reported a positive surprise, according to FactSet. That would mark the highest percentage of reported surprises within the S&P since 2008 if that figure holds throughout the earnings season.

Profit growth for the second quarter is expected to come in at 76%, according to Refinitiv, which would be the best growth since 2009. Profit margins have also held up in the face of rising inflation, with companies reporting average profit margins of 12.8% so far for the second quarter, above the historic range, according to S&P Global.

American Express reported better than expected quarterly results Friday morning, giving its shares a 1.3% boost.

It was a good week in the stock market if you don't factor in Monday's big sell-off.

In terms of sectors, Technology (XLK) led the pack this week on the back on strong earnings announcements:

Healthcare (XLV) and Industrials (XLI) also had decent gains but Financials (XLF), Real Estate (XLRE), Energy (XLE) and Utilities (XLU) were all flat or languished this week.

Was the spread of the delta variant a factor for tech's outperformance? It surely helped.

In his latest weekly comment, Francois Trahan of Trahan Macro Research is still sticking with value stocks for the second half of the year, noting this:

All in all, we expect Value/Cyclicals to regain leadership of the market in the second half of the year.

Admittedly, it's not easy to like Value/Cyclicals and even harder to own them. Indeed, if you own those segments you have seen them underperform for months now. Still, much of the alpha in those areas seems to come in short bursts like in February or even November last year. At the end of the day, Value is still beating Growth on a year-to-date basis but it is true that Growth has outperformed more frequently. You have to really believe the Cyclical story to own Value here because the moves are so sudden they are hard to chase.

In his weekly market wrap-up, Martin Toberge of Canaccord Genuity notes this:

This week we highlight the growing divergence between global equities and other risk-on indicators. Indeed, relative to early May levels, bond yields, copper, and the CDN$ are down while high-yield bonds have underperformed Treasuries. When combining these four risk-on factors, our Chart of the Week shows the divergence with stocks lately. Importantly, our risk indictor is nearing the contraction territory which could raise a red flag on stocks if the 2014, 2018, and 2020 episodes are any guide. That said, the current gap could close with a rebound in our risk-on variables. Down the road, we will pay attention to our risk indicator because history shows that the longer it stays below zero, the higher the risk for stocks. Otherwise, our Risk-On/Risk-Off neural network, which captures intermarket relationships, is issuing a tactical sell signal today on the S&P/TSX with a reading at -3.9%. The signal holds for the next three months (see next page). Thus, we reiterate our near-term cautious stance on equities, and our conviction will grow if our risk indicator does not revert upward.

Last week,  I wrote a comment on whether Risk-Off was starting to creep in on Wall Street. 

I remain cautious but now more than ever, it's a trader's market, if you're in the right stocks, you're making a killing: