Market Forecast For The Week of July 26, 2021
FORECAST: The S&P 500 hits 4429 in gradual move upwards on accelerating EPS estimates & limited fears re liquidity tapering, global growth, inflation & macro stability. The US yield curve remains low with the risk of a bull flattening as inflation expectations have stabilized ~ 2%; the bull flattening is helping drive risk assets to US equities. Fears of global growth slowdown due to COVID, China deleveraging and Chinese statism are balanced by robust signs of pent-up demand & potential for vaccine hesitancy to evaporate due to legal restrictions on the unvaccinated. Geopolitical risks remain modest for both DM & key EM, while the suffering in nations like Myanmar, Iraq, Iran, Ethiopia, the Palestinian domains, Argentina, Colombia & Venezuela pose limited threats to regional stability, let alone to investor confidence in global GDP growth & multinational profit margins.
US large-cap firms are benefitting from accelerating EPS estimates from Wall Street analysts, with last week’s ratio of increasing estimates to decreasing being the highest I’ve tabulated since the Pandemic. Valuations have come down from the highs of earlier in the year, and measured against EPS growth near 20% for the average large cap firm this year (~ 9% for 2022) these high valuations levels leave investors sanguine rather than concerned.
The macro financial backdrop is risky but still bullish. Cross-border bank claims are high (the latest BIS data shows an increase in Q4 2020 of $431 billion, up 6% year on year), indicating contagion risk is higher than normal, but not at pre-Pandemic or pre-GFC levels. EM debt repayment remains murky for badly run nations (e.g., Turkey, Argentina) but moderate global growth is buoying export confidence in major EMs. $US liquidity is abundant with no major regional shortages, and there has been no major chatter regarding concentration risk or counterparty risk at large financial institutions.
Current market positions include longs in Fiserv (FISV), Korn Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).