The euphoria on Wall Street suggests it could be another bubble or market fad. They tend not to end well. So, does this rally run on smoke?
There are growing concerns that stocks have continued to climb even as the global economy remains mired in recession.
The labor market in the United States is far from pre-pandemic levels – although there are gradual signs of improvement.
The economic crisis in the United Kingdom is particularly painful. And JPMorgan Chase (JPM) CEO Jamie Dimon said in a recent interview with CNN’s Christine Romans that the surge in the market does not reflect the harsh economic reality that many people face.
This makes it even more critical for the White House and Democratic Congressional leaders to come to an agreement on more stimulus.
“The US job market continues to show signs of stabilizing, but calling it a ‘healing’ is a bit of a stretch,” Samuel Rines, chief economist at Avalon Investment and Advisory, said in a report.
“The economic consequences of this level of unemployment have not been fully felt by the economy because of the large transfer payments from the government,” Rines added. “As the surge payments expire, the US economy will begin to feel the pain more keenly.”
It’s also worth noting that the income – to be frank – has been terrible.
Profits of S&P 500 companies plunged nearly 34% in the second quarter, according to FactSet analyst Marc Evans. It was the worst drop in five years. And sales fell almost 9%, the biggest drop in almost four years.
Evans also noted that S&P 500 earnings are now expected to fall nearly 19% this year, from an expected drop of just 1.2% in March.
Add all that up and you have a market that looks overheated, according to Barry Bannister, head of institutional equity strategy at Stifel. He wrote in a recent report that the S&P 500 could be overvalued by up to 10% at the moment.
Bannister fears investors are underestimating the risk of another surge in coronavirus cases, causing further damage to the job market and earnings growth later this year. He also believes the earnings estimates for 2021 are too high and will need to be revised downwards.
For now, tech stocks like Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) continued to drive the market higher with strong earnings. But it may not last forever. And even quality companies can get too expensive.
“The S&P 500 valuations kept us awake at night,” Lori Calvasina, head of US equity strategy at RBC Capital Markets, warned in a report, adding that the recent race in tech stocks is reminiscent of the Nasdaq 20 dot-com bubble. years ago.
All eyes on Chinese consumers
Chinese consumers, like just about everyone else in the world, are buying more online and on their phones. This should be good news for local e-commerce giants Ali Baba (BABA) and JD.com (JD), both of which are due to release their second quarter results.
One of their rivals, Pinduoduo (PDD), whose shares have more than doubled this year, will also publish its latest results.
Shares of JD have climbed 75% in 2020, while shares of Alibaba have risen by around 20% since the start of the year. The Chinese economy rebounded in the second quarter after contracting sharply in the first three months of the year due to the coronavirus.
Analysts are forecasting an almost 30% increase in sales for JD from a year ago, while revenue is expected to grow nearly 50% at Alibaba.
But as investors applaud the return of the Chinese consumer and the economy in general, there are growing fears that Alibaba will become the next target in President Donald Trump’s war on Chinese tech companies.
The United States has already announced crackdowns against TikTok, the popular social media app owned by Chinese ByteDance, as well as a WeChat ban from Tencent. And now the United States Securities and Exchange Commission is reviewing Baidu (START) video streaming unit iQiyi (IQ)for suspected fraud.
Trump wants ByteDance to sell TikTok’s US assets. Microsoft (MSFT) confirmed that he had discussed this with the president and that there were also rumors Twitter (TWTR) may be interested in a deal.
following
Monday: JD.com revenue
Tuesday: Walmart (WMT) and Home Depot (HD) earnings; Housing starts and building permits in the United States
Wednesday: Lowe’s (LOW), Target (TGT), Brands L (KG) and Nvidia (NVDA) earnings; Minutes fed
Thursday: Alibaba’s profits; weekly jobless claims in the United States
Friday: Deere (OF), Foot Locker (FL) and the profits of Pinduoduo; Sales of existing homes in the United States
