Before The Bell - Trading in the month of May—fresh off a 30-day stretch that saw the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite produce respective gains of 2.7%, 5.2%, and 5.4%--will begin with investors focused on many of the same issues that drove the market in April. Investors continue to weigh very positive data from Corporate America and the business beat against Wall Street’s uneasiness about the Biden Administration’s tax policy proposals and concerns about inflation rearing itself down the road, as the economy likely rebounds sharply from the coronavirus pandemic. This week, the attention will again be earnings, and a number of important economic releases, the latter culminating with April’s employment data on Friday. The labor market data may provide more clues about the economy and inflation, with some thought given to the average hourly wage figure. So far this morning, the futures indicate that the bulls are looking to retrace Friday’s selling.
As noted, the reports from Corporate America have been very supportive for equities, with an overwhelming majority of S&P 500 companies exceeding expectations and providing encouraging near-term outlooks, underpinned by an expected jump in second-half output as the COVID-19 vaccines reach the large majority of the U.S. population. Last week, the focus of Wall Street was on the technology sector, and the results did not disappoint, with blowout reports from technology behemoths Amazon.com (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG), among others. (Subscribers should note that our latest review of the Internet Industry in Issue 13 of The Value Line Investment Survey is available this morning on valueline.com.) We noted here prior to the start of the first-quarter earnings season that some profits could be made in the technology sector, which was a laggard earlier this year on rising fixed-income yields. That certainly proved true last week, with some of the aforementioned names moving higher on their quarterly releases.
Meantime, we expect stocks in the industrial and services sectors to be on the radar of Wall Street this week. Reports on manufacturing activity (due at 10:00 A.M. EDT this morning) and nonmanufacturing activity (Wednesday morning) will likely bring the focus to these two areas. The expectation is for strong reports on both fronts, fueled by the continued reopening of the U.S. economy, as vaccinated Americans are getting more comfortable with partaking in activities outside their homes. The travel and leisure stocks got a boost last week from reports that the European nations will open this summer for vaccinated American tourists. The services data also will provide a snapshot on what impact the $1.9 billion stimulus package is having on consumer spending. A good report and outlook may have a positive impact on some of the services companies, including those in the recreation, entertainment, retail and wholesale trade, and food services industries.
Investors should also keep an eye on stocks tied to infrastructure, as the Biden Administration continues to push a plan to revitalize roads, bridges, tunnels, ports and airports. This would probably give a boost to some of the construction, building materials, and heavy equipment companies and their stocks. There also is a sense that any infrastructure plan will include green energy policies, which would probably help some of the alternative energy (i.e., solar energy) companies. The green focus may also accelerate the adoption of battery-powered automobiles.
Before the open, the equity futures presage a higher start for the U.S. stock market. Overseas, the equity markets in China and Japan were closed for a public holiday, while the European bourses are in positive territory. Driving equities higher in the euro zone was a report showing Germany’s monthly retail sales data came in far better than expected. This report, along with a series of positive data on the U.S. economy, is supporting investors’ appetite for riskier assets. Recent business surveys, including a report last week showing that U.S. consumer confidence soared to a 14-month high, suggest that nations coming out of pandemic-driven lockdowns may unleash savings built up over the last year in the second half of this year. This theme is clearly underpinning the recent desire for high-growth stocks on Wall Street. Stay tuned. – William G. Ferguson