EQUITY MARKET OUTLOOK:S&P 500 rises 2.9% in August, gaining floor for the seventh consecutive month Whereas robust earnings development could
EQUITY MARKET OUTLOOK:
- S&P 500 rises 2.9% in August, gaining floor for the seventh consecutive month
- Whereas robust earnings development could also be a optimistic catalyst for shares over the medium time period, there are near-term dangers on the horizon
- The prospect of a tax hike and financial tightening might trigger a brief pullback in threat belongings in September
Most learn: S&P 500 Technical & Sector Outlook, XLRE & XLE in Focus
After setting an all-time excessive on Monday, the S&5 500 retreated barely on Tuesday on profit-taking and a few defensive sentiment. Regardless of the small pullback, the benchmark index for giant U.S. companies closed August up 2.9%, rising for the seventh consecutive month and posting its greatest successful streak since 2017.
Beneficial properties had been undoubtedly supported by stable earnings development and bullish company steering following robust second quarter efficiency. As a reminder, of all of the S&P 500 corporations which have reported outcomes up to now, ~90% have crushed EPS expectations by a median of 19%, a determine considerably above the five-year imply of seven.8%.
With company income rising at a superb tempo and a rosy earnings outlook because the financial restoration takes maintain and corporations adapt to the altering enterprise circumstances introduced on by the pandemic, there’s scope for shares to rise additional over the medium time period on the again of valuation help and really low rates of interest.
Nevertheless, on a shorter-term horizon, there could also be some headwinds, particularly since we now have not seen a 5% drawdown in 10 months, a really uncommon and maybe unhealthy prevalence in fairness markets. That stated, there are two key dangers looming for the S&P 500 heading into September:
- The prospect of upper taxes
- Financial tightening by the Federal Reserve
HIGHER TAXES
When Congress returns from summer time recess within the coming weeks, Democrats will start negotiations to craft their “$3.5 trillion human infrastructure package deal”.The laws, which might move by way of reconciliation with out a single Republican vote, will possible roll again a number of the earlier administration’s tax cuts. As traders get up to the potential of a company tax enhance, whether or not retroactive or simply retrospective, market sentiment might bitter within the blink of an eye fixed, triggering a massive however short-term sell-off in threat belongings.
MONETARY TIGHTENING
After the Jackson Gap Symposium, it grew to become clear the Fed is inclined to attend a bit longer earlier than starting to cut back asset purchases. Though no taper announcement is prone to come on the September FOMC conclave, the central financial institution might use the assembly to prime traders for a November determination. As merchants begin to worth much less coverage lodging (market is ahead wanting), US treasury yields might begin their subsequent leg increased, weighing on tech corporations with exorbitant price-to-earnings ratios. This will likely turn into a drag on the tech sector and due to this fact, on the S&P 500 (know-how corporations account for roughly 30% of the S&P 500).
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Supply: TradingView
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—Written by Diego Colman, DailyFX Market Strategist
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