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Before The Bell- The new trading week will begin with the major equity averages either at or near record highs. With these recent gains, though, come stretched price-to-earnings multiples, and this will likely test the mettle of investors and have them looking closely at first-quarter earnings season, which is set to kick off this week. A good showing from Corporate America would be a key component, along with the recent encouraging economic data, in keeping the upward momentum going. After a quiet start to this week on both the earnings and economic fronts, the news picks up on Wednesday morning when banking giant JPMorgan Chase (JPM) gets the earnings season rolling with its March-period results. 

The most recent move higher has been driven by a few factors, most notably the continued massive fiscal and monetary support to combat the economic disruptions caused by the coronavirus pandemic. This flood of liquidity into the financial system, along with the continued rollout of the COVID-19 vaccines and expectations that the second half of the year will see strong economic growth, has provided wind in the sails of the bulls. 

The one caveat, though, for the investors are worries that the aforementioned unprecedented stimulus spending and economic growth may lead to inflation down the road, and that scenario would likely bring an end to the “easy money” era on Wall Street. We have seen patches of selling this year on inflation worries, particularly when Treasury yields are on rise. During those stretches of profit taking, the higher-growth stocks in the technology heavy NASDAQ Composite and the small-cap Russell 2000 have been the hardest hit. Overall, there has been an appetite for the value stocks and that pushed the large-cap Dow Jones Industrial Average and the S&P 500 Index to record highs last week. Investors should note that tomorrow morning, the Labor Department will release consumer pricing data, which could possibly bring the inflation conversation back to Wall Street. 

As noted, the big event for investors this week will be the commencement of first-quarter earnings season. The prevailing consensus is that it will be a profitable one for the S&P 500 companies, with earnings estimates being ratcheted up in recent months. This may be needed to push stocks off of their already lofty perches. Conversely, any slipups by these companies may be bad news for their stocks, as the market in many areas is looking priced for perfection right now. This week all eyes will be on the banking Industry, as heavyweights JPMorgan Chase and Goldman Sachs (GS) headline on slew of reports from the sector. The banking stocks, after a difficult performance in 2020, have done very well year to date. Our sense is that the financial issues may be a good play, as investors continue to look at the value names.

The banking stocks also may be a play against the concerns about inflation. The banks would stand to benefit from higher lending rates, which boosts their net interest income. The recent positive outlook for banks has been helped not only by the recovering global economy from the pandemic, but by the sharp rally in Treasury yields. Year to date, the yield on the benchmark 10-year Treasury note has advanced more than 70 basis points. The S&P 500 financials sector has gained more than 18% during that stretch, which is double the return of the broader market. The banking stocks have been a key beneficiary of the recent rotation into the cyclical stocks.  

Meanwhile, the ongoing push by the Biden Administration for a comprehensive $2.3 trillion infrastructure bill may continue to serve as a catalyst for the infrastructure and transportation sectors. The construction companies, the heavy equipment makers, and the basic materials suppliers would likely be among the major beneficiaries of President Biden’s “American Jobs Plan”. Not surprisingly, given the recent focus on infrastructure and continued economic re-openings, the Dow Jones Transportation Index is up an impressive 19.3% year to date. Our expectation is that any proposed infrastructure bill will probably be heavy on green initiatives too, which should help the alternative energy companies and ultimately their stocks. In recent years, we have seen a major push by the automakers to develop and manufacture their own line of battery-powered cars and SUVs to compete with sector leader Tesla (TSLA). This push is likely to get a boost from the Biden Administration’s ESG policies.

The start of earnings season will not be the only thing on the minds of investors this week. In addition to the aforementioned consumer pricing data, we will get reports on retail sales, industrial production, and continuing initial jobless claims (all scheduled for release on Thursday morning). Then on Friday, the focus shifts to the housing market, with the latest data on housing starts and building permits. Given, the sizable impact the services and homebuilding sectors have on the nation’s output, the retail sales and housing data will provide a major reading on how the economy is faring, as well as the Federal Reserve’s latest Beige Book summation of economic conditions (released on Wednesday afternoon at 2:00 P.M. EDT). Investors should take a close look at the retailing stocks, as the sector may get a second-half 2021 boost from the improving economy and continued re-openings from COVID-19 shutdowns across the country. Conversely, the housing industry has showed some signs of slowing recently, and with bond yields on the rise, higher borrowing costs may eventually make affordability an issue for prospective buyers, especially those looking at the lower-priced end of the housing market.

Before the market open, the equity futures point to some modest profit taking at the start of the new trading week stateside. So far overseas the results have been mixed. The main indexes in Asia finished lower overnight, while the major European bourses are slightly higher. Trading in Europe is getting some support from reports that England has entered phase two of its reopening plan, which is expected to give a boost to the United Kingdom’s economic outlook. Stay tuned. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.