NASDAQ rebounds as bond yields fall
- S&P 500 new high with ‘peak’ inflation, patient Fed, and 10-year bond yields under 1.50%. NASDAQ and ‘bond proxy’ real estate led, whilst financials fell.
- The so-called meme stock rally has returned, with our index up over 50% the last month, and showing the benefits of stock diversification amidst strong signs of broader retail investor interest in markets.
- The World Bank followed the OECD in raising global GDP forecasts to +5.6% for this year, as reopening picks up, supporting earnings. Q2 EPS growth now forecast at +61% yoy in the US and +95% in Europe.
- Strong earnings growth is the key insurance policy against risk of lower valuations, as inflation and bond yields rise. Reflation favors commodities, cyclical sectors and international markets vs tech and US.
US inflation peaks at 5%
- May US inflation was the main-event last week. Despite soaring 5% yoy, bond yields fell and equities rallied, as 1) increases seem ‘transitory’, 2) expected by investors, and 3) this was likely the inflation peak.
- We quantified the impact of bond yields on equity valuations, with every 0.5% move impacting P/E ratios by 10%. We expect yields to rise, but impacts to be offset by the rising GDP and earnings outlook.
Semiconductors the ‘new oil’
- A global semiconductor chip shortage is impacting the auto sector, and related economies (Germany). Chips are the ‘new oil’, central to the economic outlook, with 12% industry growth seen this year.
- Sector barriers-to-entry have grown, benefitting incumbents such as TSMC (TMC), Samsung (SMSN.L), and Intel (INTC), as the sector consolidated, investment needs soared, and complexity increased (’it’s not rocket scientist — it’s more complicated’).
Bitcoin seeing some support
- Bitcoin continues to build a base after its recent 50% correction, helped by more attractive valuations (such as stock-to-flow model) and El Salvador the first country to approve as legal tender (with 20% its GDP from remittances). This offset a continued China crypto-mining crackdown. Crypto is the best performing asset class YTD, with bitcoin +23%.
Why breakfast is costing more
- The Bloomberg Commodity Index is now +22% YTD, led by oil +40% and Brent holding over US$70/bbl after strong demand outlook from both OPEC and the International Energy Agency (IEA) last week.
- Agricultural commodities have surged with our ‘Breakfast Index’ of six common morning foods (from oats to OJ) up over 50% from lows last year, with increased supply restrictions. Has helped producers but hit consumers and raised inflation pressures.
The week ahead: Fed week
- US Fed meets (Wed) with focus on potential talk about ‘tapering’ bond market support and updates to its macro forecasts. We see a likely Q4 tapering.
- May retail sales and industrial production from the US and China will take the recovery-pulse in the world’s largest economies, as the global GDP outlook improves.
- Video-game E3 trade event, Robin Hood Investors Conference ’best ideas’, and quarterly results from Oracle (ORCL), Adobe (ADBE), and Kroger (KR).
Written by a team of experienced financial analysts at eToro.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.