As we begin a shortened trading week, our head of markets shares his latest analysis.
With most major economies in the midst of a slow grind towards normality, markets continue to search for beneficiaries of the recovery.
In the US, there is further evidence of the “reopening” trade, with investors anticipating stocks and sectors likely to benefit from the return to some kind of normality. This in turn has applied some pressure on tech stocks, despite their largely upbeat earnings numbers, where valuations are coming under increasing scrutiny as the scale of their recent pandemic success comes into question as lockdowns subside.
This rotation did not filter through to Estee Lauder (NYSE:EL), however, whose shares were down 8% following disappointing sales numbers. Results confirmed that with most of us still working and socialising from home, the need for their products has largely evaporated for the moment.
Overall, however, US earnings generally for this quarter have been smashing estimates, suggesting that the effects of the various stimuli are beginning to wash through. With improving economic data and a largely accommodative stance in the background from the Federal Reserve, the recovery is slowly becoming entrenched. As such, much of the improved situation may be priced in, which will inevitably lead to questions not just on the strength of the economic recovery, but for how long it can be maintained when pent-up demand has been satisfied.
The major indices remain comfortably ahead in the year to date, with the Dow Jones up by 11.5%, the S&P 500 11.6% and the Nasdaq 7.8%.
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In the UK, a shortened trading week includes updates from two of the hardest hit sectors from the pandemic. Both InterContinental Hotels (LSE:IHG) and British Airways owner International Consolidated Airlines (LSE:IAG) will provide updates, with cash burn being a feature particularly for the latter. More broadly, the stocks share one particular concern post-pandemic in the form of the opportunities arising from business travel. For both, this was a lucrative line of business, but the ability to be able to justify costly international travel for business following the clear success of virtual meetings during the pandemic is an obvious overhang on their recovery prospects.
As an investment destination, the UK continues to benefit from a warming of sentiment from international investors, and is still seen as something of a value play compared to many of its overseas peers. In particular, the influence of the banks, oils and miners within the premier index are seeing the benefit of an increasing move towards cyclicals, as evidenced by some recent updates suggesting that an inflection point in their fortunes may have been reached.
With the FTSE 100 ahead by 8.5% in the year to date, the scene is set for further positive momentum if the pace of recovery can be maintained over the coming quarters, which is eminently possible given the improving backdrop and fairly weak comparatives.
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