Stock markets swung sharply last week as disappointing economic data and corporate earnings results later in the week erased early gains from easing coronavirus lockdown restrictions and promising Covid-19 treatment developments. For the week, the S&P 500 and the Dow each lost -0.2%, while the Nasdaq Composite eked lower by -0.3%. Despite ending the week on a lower note, U.S. equities posted the strongest monthly gains since 1987 in April as the S&P 500 and Dow gained 12.8% and 11.2%, respectively, and the Nasdaq Composite surged 15.5%, driven by its heavy weighting to the information technology sector that is approaching 50% of the index.
In the weakest earnings season in more than a decade, the information technology sector has proven slightly more resilient thus far, though far from immune. According to FactSet, information technology companies in the S&P 500 have beaten analyst estimates by almost 9% and are on track for about 5% year-over-year growth in the first quarter, compared to a -1% surprise and a nearly -15% drop in earnings for the index as a whole. However, the second quarter is expected to see a much sharper drop in earnings with tech sector earnings forecasted to decline over -8% over the prior year, while the S&P 500 earnings overall may dip as much as -40%, according to FactSet.
Meanwhile, the initial preliminary U.S. GDP report for the first quarter showed that the U.S. economy shrank at a -4.8% pace in the first quarter, driven largely by one of the sharpest reductions in consumer spending on record. In response to the economic shock, government officials continue to forge ahead on additional stimulus relief efforts including the potential for a third infusion of funds toward small business rescue and payroll loans. More than half of last week’s $310 billion infusion is already spoken for in addition to the first $350 billion tranche. The loan program has also hit some snags as many small business owners are sitting on the funds due to uncertainty that they will be able to meet the loan forgiveness requirement to spend 75% of the proceeds on payroll within 8 weeks of receiving the money.
Adding to concerns from corporate earnings and economic data, a flare up in tensions between the U.S. and China has also weighed on investor sentiment recently as U.S. intelligence members are investigating claims that the coronavirus escaped from a laboratory in Wuhan, China, which the Chinese administration has categorically denied. However, U.S. Treasury officials have provided reassurance that the U.S. won’t implement any economic punishment on China if it continues to abide by the recent trade deal.
In the week ahead, the steady stream of corporate earnings reports will continue with over 150 companies from the S&P 500 set to announce results. On the economic front, investors await an update on the unemployment rate from the U.S. Labor Department on Friday. Following an increase in unemployment filings of 30 million over the past 6 weeks, the consensus unemployment rate forecast sits at about 16%. In addition to earnings and employment, our investment team will continue to monitor the success of efforts across the nation to reopen the economy. Despite progress in returning to work, the resumption in consumer spending is vital to the economic recovery and it will likely be slower to return as consumers remain wary of health risks from in-person interaction.
