Strong earnings from big tech corporations are keeping the market momentum positive. However, the surge in commodity prices have fueled the fears of inflation as the consumer staples sector witnesses downward pressure.
On Monday, April 26, the US stock market remained upbeat with the S&P 500 and Nasdaq Composite registering marginal gains to close at record highs. The market rallied as Wall Street geared for one of the busiest weeks for the Q1 big tech earnings report.
The S&P 500 (INDEXSP: .INX) surged 0.18% and closed at a new record high of 4187 levels. While the Nasdaq Composite (INDEXNASDAQ: .IXIC) surged 0.9% or 121 points hitting a new record high of 14,138 levels.
Tesla Inc (NASDAQ: TSLA) was the first among the heavyweight companies to report strong earnings for the first quarter. Tesla reported a record $10.9 billion in revenue and a record $438 million in net income for Q1 2021. Some of the other tech heavyweights reporting their earnings this week include Microsoft Corp (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL), Google LLC (NASDAQ: GOOG) and Facebook Inc (NASDAQ: FB). These tech giants contribute around 40% of the S&P 500’s market cap. Speaking to Reuters about the market reaction, Sal Bruno, chief investment officer at IndexIQ said:
“We’re way above the average for firms reporting earnings above estimates. More important than the fact that they are beating on estimates is that they are raising their expectations and outlooks going forward, and that’s giving the markets a nice boost”.
Utilities and Consumer Staples Sectors See Decline amid Big Tech Earnings Reports
With the fears of inflation fueled by the surge in commodity prices, the consumer staples sector dropped 1% on Monday. The Dow Jones Industrial Average (INDEXDJX: .DJI) dropped 0.2% to 33,981 levels dragged down majorly by giants like Walmart Inc (NYSE: WMT), Coca-Cola Co (NYSE: KO), and P&G (NYSE: PG).
On the other hand, the Bank of America showed that the number of “inflation” mentions has tripled over the last year. This is one of the biggest surges since 2004. In a note on Monday, Savita Subramanian, the head of US equity and quantitative strategy at Bank of America, said:
“Inflation is arguably the biggest topic during this earnings season. Raw materials, transportation, labor, etc. were cited as major drivers of inflation and many plan to (or already did) raise prices to pass through higher costs.”
The positive thing is that corporates have managed to beat Wall Street forecasts so far in this earnings season. Of the 25% of S&P 500 companies reporting their Q1 2021 results, 84% have reported positive per-share earnings while the 77% have also topped revenue estimates.
“Growth is still improving and liquidity is still abundant. The bull market remains intact, and I struggle to see the type of calamity that defined the summers of 2010, 2011, 2012 and 2015. But a harder, choppier, more range-bound summer does seem likely,”said Andrew Sheets, the chief cross-asset strategist at Morgan Stanley.
However, strategists are keeping a close watch on the high valuations at which these companies are trading. Besides, the market trading at record highs is keeping them at the edge of their seats.
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