Market Forecast For The Week of August 2, 2021

FORECAST: The SPX moves up its channel toward 4490, as firms continue to guide strong EPS for 2021/22 even as supply chain, government policies and labor shortages create revenue and cost challenges. Robust profit growth is attracting capital flows from both US and foreign investors, resulting in $US weakness against the € and EM currencies (excluding China) as foreign investors hedge their US equity exposure. The move higher in SPX will be accompanied by rising volatility, which has steadily climbed from mid-June lows and will be further irritated by daily headlines concerning employment & prices (leading up to Friday’s employment report), Fed liquidity tapering, global GDP & COVID vaccination rates, and Biden’s interventions in the economy. With US inflation expectations stabilizing just > 2% real yields will fall further over the next few weeks into negative territory, further boosting risk assets like US equities & major commodities (gold, copper, oil). Adding a further boost is the Chinese Communist Party’s near-daily revelations of insecurity regarding powerful Chinese firms, harming Chinese business confidence to the benefit of US firms.

US large-cap firms are reporting 2nd quarter EPS and Wall Street analysts continue to raise estimates, accelerating bullishness from already lofty levels. Projected EPS growth for the largest S&P 500 firms rose from a 20% to 21% clip, while 2022/23 growth is being downgraded modestly. Despite fears of a return to slow growth by mid-decade, investors are sanguine as productivity growth continues to support margin & profit growth more so than dramatic wage growth.

The macro financial backdrop is risky but still bullish. Cross-border bank claims are high (the most recent BIS data shows an increase in Q1 2021 of $646 billion, partly due to seasonal factors but still high, and due to comparisons with Q2 2020 it registered as a slight decline of -0.6% year on year), indicating contagion risk is a concern. 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 Facebook (FB), Korn Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).