Before the Bell - The penultimate trading day of the first week of May will have investors looking to the business beat for direction. With the first-quarter earnings season starting to slow down a bit, the economy is getting more attention from Wall Street and, for the most part, it has proven supportive for equities. But with the sharply recovering economy—reflected in this week’s strong reports on April manufacturing and nonmanufacturing activity—have come concerns about it overheating and inflationary pressures intensifying as the year progresses. That sentiment took the steam out of the high-growth technology sector the last few days, after many of its stocks got a boost last week following impressive quarterly results from industry giants, including Amazon.com (AMZN) and Apple (AAPL).

The focus for the remainder of the week will turn to the U.S. labor market. Just minutes ago, we learned that initial weekly jobless claims fell to a coronavirus pandemic low of 498,000 in the latest week. That report did not have much of an impact on the equity futures, which were relatively unchanged leading into the release and are still pointing to a flat opening for the U.S. stock market. The weekly jobless claims release sets the stage for April’s employment report, which is due at 8:30 A.M. EDT tomorrow. The consensus is that nonfarm payrolls rose by nearly one million positions last month, and the unemployment rate fell from 6.0% to 5.8%. The report is not likely to change the narrative that the economy is recovering sharply from the coronavirus setback, but what it could do is further sentiment that inflationary pressures are emerging. Economists will likely zero in on the average hourly wage figure. A bigger-than-expected increase in wage growth may bring more consternation about inflation.  

The high-growth stocks, as noted, took a hit this week—the technology-heavy NASDAQ Composite fell nearly 2% on Tuesday and was unable to escape red ink again yesterday during a session where the Dow Jones Industrial Average set another record high—following remarks by Treasury Secretary Janet Yellen. The former Federal Reserve Chair said that interest rates may need to rise to keep the U.S. economy, which is benefiting from the rollout of COVID-19 vaccines, from overheating. That stoked concerns about inflation and thoughts that the central bank could possibly tighten the monetary reins sooner than expected. Ms. Yellen later walked back her comments, saying a near-term interest-rate hike was something that she was not “predicting or recommending,” and the decision on a monetary policy lies with the Federal Reserve. Still, even the thought of a less accommodative lead bank would not be an ideal backdrop for stocks, especially the high-growth names in the NASDAQ Composite and the small-cap Russell 2000.

Meantime, we did get some earnings reports since yesterday’s closing bell. With stocks looking priced for perfection these days, any news deemed disappointing is likely going to bring a harsh response from Wall Street. Of note, shares of ETSY Inc. (ETSY) were down sharply in pre-market action after the online marketplace for independent sellers said revenue growth is likely to slow in the second half of the year. Likewise, the stock of Rocket Companies, (RKT), the largest mortgage lender, with a massive online presence, were indicating a weaker opening after reporting quarterly results. On the other hand, the stocks of Paypal Holdings (PYPL) and Anheuser-Busch InBev (BUD) are looking at higher starts to the trading day.  

So where should investors look in this environment? The value stocks, which were in high demand earlier this year when rising Treasury bond yields brought worries about inflation, remain an option for investors. Stocks in the infrastructure sectors, including the basic materials and transportation industries, are doing well in the early stages of the Biden Administration and may continue to do so as the President pushes his “American Jobs Plan” agenda. Investors also may want to give the banking stocks, which were laggards last year on worries about the U.S. economy, but have done quite well this year, a closer look. Higher lending rates increase the earning power of the banks. (Our latest analysis of the Banking Industry in Issue 13 of The Value Line Investment Survey is available this week to subscribers on valueline.com.) The travel and leisure issues may also continue to benefit from economies reopening around the globe and more people starting to make vacation plans. – William G. Ferguson

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