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Weekly commentary

Retail sales, bank earnings keep equities aloft

Equities Investment Council
The Nuveen Equities Investment Council is led by Saira Malik and comprises the firm’s senior portfolio managers averaging three decades of investing experience.
Saira Malik
CIO, Head of Global Equities
Equities Investment Council member Saira Malik

Weekly market update highlights

Global equity markets closed out a second consecutive week of gains. U.S. equities had their best week since July with the DJIA gaining 4.3% and the S&P 500 and the Nasdaq advancing 3.9% and 3.1%, respectively. Outside the U.S., the MSCI EAFE, EM, and ACWI ex USA each added nearly 2% or more for the week.

Market drivers & risks

Economic week in review

The next few months could remain challenging, and continued high volatility and possible near-term market selloffs are likely.

Risks to our outlook

The agreement to delay the U.S. debt ceiling deadline may have calmed markets for now, but volatility might continue to rear its head as the December 3 deadline approaches.

Earnings season could prove to be more of a headwind for equities, as investors begin to digest the true fallout from the Delta variant surge, tax and regulatory risks from legislative plans, supply chain issues and corporate warnings.

Markets are beginning to assess the expected impacts of potential increases in the U.S. corporate tax rate and the minimum tax on U.S. companies’ foreign income.

The Fed will be under intense scrutiny as it tiptoes toward contractionary policy. With markets so accustomed to quantitative easing and low rates, volatility is likely to rise as investors grow leery of a misstep in timing and/or magnitude.

Best ideas

In the U.S., reflation and expectations for higher yields could bolster returns for small caps, as well as companies with pricing power and reopening tailwinds. Supportive monetary policy and the prospect of stronger relative earnings growth could be catalysts for select stocks in cyclically oriented sectors to outperform in developed non-U.S. markets, particularly in Europe. Select growth companies well-positioned for reopening, such as front-office software leaders, also look attractive given recent weakness. We continue to advocate a long-term approach that tilts toward cyclicals and value stocks exhibiting strong earnings growth and pricing power.

In focus: Even-keeled earnings expectations

The largest financial institutions in the U.S. provided ballast for equity market bulls last week following a round of earnings reports that exceeded expectations and spoke to the underlying strength of the U.S. economy. While the messaging from big banks was broadly positive, we are approaching the rest of earnings season with a degree of caution.

Consensus expectations for third quarter earnings growth among S&P 500 companies are between 25% and 30%, slightly higher than for the first quarter of 2021. While earnings growth eventually topped 50% in 1Q, a number of high-profile factors (Delta, supply chains, inflation, the end of stimulus) will likely keep actual 3Q growth rates around the 30% to 35% range. In fact, earnings revisions for the third quarter are the lowest of 2021 so far, with estimates increasing by a modest 3%-4% since the end of June, versus double-digit percentage increases in the previous two quarters. Guidance has been more moderate, too; nearly half of companies reporting so far have issued negative EPS guidance.

Our caution, however, should not be mistaken for bearish sentiment. Trailing and forward-looking valuations have compressed significantly for the S&P 500, having fallen 10% to 20% from first quarter levels. This should allow equities to grind higher even in the face of decelerating earnings growth. The best-positioned companies are those that can build inventories and protect/grow their margins until the headwinds created by inflation and global supply chain disruptions begin to dissipate.

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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services

Endnotes

Sources

All market data from Bloomberg, Morningstar and FactSet

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