S&P 500 posts fourth consecutive record close, Dow clinches 36K level

It was another day of cheer for US equity markets, with all three major bourses clinching fresh record closing levels; the S&P 500 gained 0.4% to close above 4630, the Dow rose by the same amount to close above the 36K level for the first time ever, while the Nasdaq 100 overcame pre-market losses to also post 0.4% on the day gain, though the index did fall ever so slightly short of conquering the 16K level. For the S&P 500, Tuesday’s close was a fourth consecutive all-time high close in a row. Equity analysts continue to attribute the ongoing rally (the S&P 500 is up more than 8.0% from the early October lows) to the strong Q3 earnings season.

Earnings

Shares of US pharmaceutical giant Pfizer rose over 4.0% on Tuesday after the company revealed in its Q3 earnings report that 2021 vaccine sales were expected to exceed $36B. More than 60% of the 320 S&P 500 companies to report Q3 earnings thus far have beaten analyst forecasts and, according to Reuters, aggregate S&P 500 company earnings are now expected to have risen more than 40% when compared to Q3 2020.

There was a particular focus on the Dow Jones Transportation Average index, which surged to fresh record highs (and is up 25% from September lows) amid a 180% spike in rental/car sharing company Avis Budget Groups share price after a strong earnings report. Avis shares (ticker CAR) seems to have joined the “meme stock” category for the day, and was one of the top trending shares on stocktwits.com, reported Reuters.

Stocks rise despite hawkish central bank shift, inflation risks

Strong earnings have underpinned US equity markets in recent weeks despite a distinct hawkish repricing of expectations for interest rate hikes in 2022 (or sooner) from most of the major G10 central banks, which has in large part been driven by a sharp rise in upside inflation risks due to higher energy prices and further evidence that it might take some time for inflationary supply chain disruptions and shortages to clear. The fact that major G10 central banks like the Fed and BoE are expected to keep long-term interest rates at historic lows (i.e. they are expected to hike a percent or two, but not back up to pre-crisis levels of 4-5% or above) seems to be one factor helping keep equity investors calm at the start of a synchronised global hiking cycle, whilst the notion that companies are largely able to pass on higher input costs to price-insensitive consumers (a theme alluded to in recent business surveys and earnings), thus maintaining high margins is another.

Equity investors may have their tolerance for the ongoing hawkish shift in global central bank policy put to the test this week as the Fed announces policy on Wednesday (they will probably announce plans to reduce QE purchases by $15B per month) and the BoE announces policy on Thursday (if they want to avoid a hit to their credibility, they ought to implement a 15bps rate hike). Otherwise, US data in the form of the October ISM Services PMI survey and the October labour market report should show that US economic growth remains robust in the first month of Q4, if not hampered somewhat by supply chain issues and labour shortages.