Dubai: The current rally seen in stock markets will be tested with a flood of earnings reports from tech and internet industry heavyweights and the top economy’s central bank meeting in the week ahead.
The US Federal Reserve meets Tuesday and Wednesday and while no action is expected, analysts view that there could be some mention of the central bank’s possible reining in of easy money policies.
US Fed meeting back in focus
Any update in this regard could move the markets since the tapering of the central bank’s bond purchases is seen as the first step on the way to interest rate hikes.
On the corporate earnings front, there are about 165 major companies releasing earnings reports in the US itself, including the biggest tech names— Apple, Microsoft, Amazon, Alphabet and Facebook.
Apart from these, Tesla is also reporting, as are industrial heavy weights Boeing and Caterpillar. There are other consumer giants, including Procter & Gamble and McDonald’s.
Q2 to be economic growth peak?
On the economic front, the second quarter is expected to be the peak period for post-pandemic growth for several key economies.
In the US, gross domestic product for the quarter will be released Thursday. On Friday, the Fed’s key inflation measure, the personal consumption expenditure inflation index, is released.
During the last week, the three major US stock indexes closed at new record highs. The Dow closed above 35,000 points for the first time, the S&P 500 gained 1 per cent, and the Nasdaq ended the day up 1 per cent.
Stocks endure more volatility
Though the S&P 500 stands at record levels after rallying more than 95 per cent from its March 2020 lows, analyst evaluate how stocks have withstood more volatility in recent days as investors seek to settle bond-market signals about the economic outlook.
The market cap of five companies – Apple, Microsoft, Amazon, Alphabet and Facebook – recently stood at 24.6 per cent of the S&P 500’s market cap, nearly the highest proportion it has been in 2021.
The strength in stocks has come amid concerns about a slowing economic recovery in several parts of the world, particularly the US, that have helped pushed down benchmark US government bond yields this week to their lowest levels since February, before rebounding some.
Q2 earnings seen soaring still
Second quarter earnings are seen up 78 per cent. Although we may not see many 70 per cent earnings growth quarters going forward, it doesn’t mean that we are looking at negative earnings growth and even if it moderates, it is still reflective of a healthy economic environment, analysts opine.
There was a momentary sell-off scare on a COVID-related growth scare last week. However, all major stock markets around the world recovered after a resurgence in the COVID-19 cases in many countries led to a carnage in stocks on Monday and Tuesday.
However on Wednesday, the Nikkei index in Tokyo and the FTSE100 in London gained. Other major indices like the CAC40 in Paris and Germany’s DAX were also trading in the green. This followed massive gains overnight in US stocks.
New COVID fears briefly shock stocks
On Monday last week, stocks around major markets had crashed, and the slump had continued in many markets on Tuesday too as concerns rose that a sharp rise in cases of the Delta variant of the coronavirus would derail the nascent global economic recovery.
The Dow Jones and S&P 500 had plunged 2 per cent and 1.6 per cent respectively on Monday. India’s benchmark BSE Sensex had closed 0.7 per cent lower on Tuesday, after a 1 per cent plunge on Monday, tracking the selloff globally.
What led to a rebound in global markets now, even as COVID-19 cases continue to rise? Analysts at US investment bank JP Morgan felt that there was potential for stocks to climb given the US economic recovery.
Economic slowdown fears premature
The analysts said they remain constructive on equities and see the latest round of economic growth and slowdown fears premature and overblown.
Elsewhere, in Japan, investor sentiment was boosted on Wednesday by a strong growth in the country’s exports, suggesting demand was picking up in major markets. Japan’s exports in June surged 48.6 per cent year-on-year, a fourth straight month of growth.
So even as the Delta variant of COVID-19 sweeps through several countries, including the US, the economic outlook will be in sharp focus, market analysts reiterate.