Markets are shifting past yet another extraordinary earnings season after seeing 87% of S&P 500 companies beating both top and bottom line expectations. In an otherwise quiet economic week, key items in focus include:
- July Federal Reserve (Fed) meeting minutes will be released Wednesday and are likely to be met with mixed reactions. Participants will gain some insight into if/how the Delta variant is affecting the central bank’s plan to reduce its monthly asset purchases. While we don’t believe the recent spike in cases will derail our ongoing recovery, it could have an impact on its expected trajectory. Any updates to be addressed at the upcoming August 26-28 Jackson Hole Summit will command increased investor focus in the context of fluid and rapid news flow.
- The fall of Kabul in Afghanistan over the weekend punctuated an unexpected resurgence of Taliban forces only to be matched by its swiftness. While this is not anticipated to have near-term economic consequences, it does underscore the reemergence of geopolitical risks that could contribute to market headwinds. Additionally, this could steal some of the traction that markets had been anticipating from the finalization of infrastructure and budget deals.
- Finally, last week, we updated our portfolio outlook specifically in the areas of emerging markets (EM) and fixed income.
- We further downgraded our views of EM equities, sparked by the continuing crackdown by the Chinese government and its broader EM ripple effect.
- We also realigned taxable fixed income portfolios by reducing allocations to longer-term government bonds in favor of mortgage-backed securities.
A look back
- Global markets advanced last week on strength in the U.S. and Europe. Asian markets lagged last week with ongoing spillover from emerging markets.
- 10/2 U.S. Treasury spreads remained unchanged for the week at 1.07% while high yield corporate spreads maintained their 3.34% spread versus the 10-year U.S. Treasury.
- 91% of S&P 500 companies have reported Q2 earnings with 87% posting positive earnings and revenue surprises. Low base effects between 2021 and 2020 are likely to fade going forward.
A look ahead
- Elevated headline headwinds from the Delta variant and turmoil in Afghanistan could set a cautious tone for the week ahead.
- July FOMC meeting minutes will be released Wednesday with markets parsing taper talks in the context of elevated Delta variant cases since that meeting.
- Economic releases: Empire Manufacturing, Retail Sales, Industrial Production, Business Inventories, Housing Starts, Leading Index, FOMC meeting minutes.
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