US stocks appear to be starting backwards on Monday, pending key inflation data and earnings reports later in the week.
Fears of rising COVID-19 cases and vaccination problems after a Chinese government official said the effectiveness of his vaccines was low has put stock markets under pressure.
However, the UK’s partial reopening and positive comments from Federal Reserve Chairman Jerome Powell created some positivity. Investors will also wait Tuesday for consumer price data and earnings from major banks JPMorgan Chase, Goldman Sachs and Wells Fargo later this week.
After a slowdown on Friday, the U.S. Labor Department said the producer price index, a key measure of inflation, rose 1% in March – the largest annual increase since 2011.
In our call of the dayGoldman Sachs strategists said higher inflation is on the way in the coming months, which could boost companies with high pricing power.
“Don’t fight the Fed” is a joke that investors have been taught to ignore at their own risk. What the central bank usually wants is usually what it gets, sooner or later, ” the strategists said, noting that the Fed’s intervention a year ago sparked the 80% rally that lifted the S&P 500 SPX.
to a record high. The index has risen 10% since the start of the year and is now trading against Goldman’s mid-year target of 4,100 – the bank’s year-end target implies a 5% gain.
The Fed now wants higher inflation, they said. The investment bank’s economics team expected inflation rates to rise in the coming months, peaking at 2.3% in April, before remaining below 2% until 2023.
When it comes to the impact on stocks, Goldman said it was all about margins, adding that some companies protected margins by passing higher costs on to their consumers.
The strategists, led by David Kostin, said companies with low pricing power have outperformed in the past as the S&P 500’s profit margins increase. By contrast, companies with high pricing power have “lagged far behind” over the past year. However, rising inflation could mean that this is about to change, and companies with high pricing power will benefit, strategists said.
Goldman looked for stocks with high pricing power – high and stable gross margins compared to peers. The screen produced 55 stocks, including video game company Activision Blizzard ATVI,
tobacco giant Philip Morris PM,
consumer goods companies Colgate-Palmolive CL,
and Procter & Gamble PG,
and drug manufacturer Zoetis ZTS,
Technology companies, such as Aspen Technology AZPN,
Adobe ADBE,
and Oracle ORCL,
and retailers Etsy ETSY,
and Dollar General DG,
can also be seen.
Regardless, with the first quarter earnings seasons kicking off next week, Goldman expected overall sales growth of 5% and earnings per share (EPS) growth of 19%. But that doesn’t matter much, the strategists added. “The trajectory of the economic recovery will make backward-looking statistics less relevant to the forward-looking market,” they said.
The next issue dominating investor discussions is President Joe Biden’s plan to increase corporate tax to 28%, Goldman said. If Biden’s proposals were passed in full, annual S&P 500 earnings per share would fall by 12% by 2022 to just 5%, she added.
The tweet
According to this chart by Jeroen Blokland, senior portfolio manager at Robeco Asset Management, higher producer prices are positively linked to the earnings of S&P 500.
The markets
US Equity Futures ES00,
NQ00,
pointed lower on Monday, with Dow futures YM00,
implying a loss of 40 points for the Dow Jones Industrial Average DJIA,
at the open. European stocks also fell during early trading, while Asian markets fell overnight as investors watched for rising coronavirus cases and slow vaccine rollouts.
The buzz
Powell said “it will be a while” for the central bank to slow down the economy, in an interview on “60 Minutes” on Sunday.
Tech giant Microsoft MSFT,
is in advanced talks to purchase speech recognition company Nuance Communications NUAN,
in a deal worth about $ 16 billion, according to multiple reports on Sunday.
Pub gardens, hair salons, gyms and non-essential shops open in England for the first time since early January on Monday as the UK takes the next step towards reopening.
Alibaba 9988,
Shares were up 7% in Hong Kong trading after the e-commerce giant was fined a record $ 2.8 billion by China’s antitrust watchdog. The American certificates of the company BABA,
were more than 6% higher in premarket trading.
Italian diagnostic specialist DiaSorin DIA,
announced a deal to purchase COVID-19 test kit maker Luminex Corp. To buy LMNX,
for about $ 1.8 billion.
Random reads
Drinkers brave the cold for midnight pints as pubs in England reopen.
Bafta Best Supporting Actor winner Yuh-Jung Youn calls British people ‘snobbish’.
Need to Know starts early and will update until the opening bell, but sign up here to get it in your email box once. The emailed version will ship at approximately 7:30 a.m. East.
Do you want more for the day ahead? Sign up for The Barron’s Daily, a morning investor briefing that includes exclusive commentary from Barron’s and MarketWatch writers.