Three factors continue to push equity markets gradually higher – BMO


The S&P 500 is up 33.5% from a year ago, and momentum has held firm over the past three and six-months, up 21% and 29% annualized, respectively. Here is a look at three factors that are helping to keep the market moving steadily higher, in the view of economists at the Bank of Montreal. 

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Asset inflation

“Goods price inflation remains a key factor; wage inflation is a potential concern, but asset-price inflation is still very much alive too. While the focus on this front tends to zero in on areas like housing, commercial real estate and cryptocurrency/meme stocks, it is very much supporting the broader equity market as liquidity on both household and corporate balance sheets looks for a home and/or a hedge.”

Longer interest rate view

“While Fed tapering is the next major policy move on the radar, it appears the market is still comfortable assuming a low-for-long interest rate environment post-COVID. For now, 10- and 30-year Treasury yields have settled in slightly below pre-COVID levels. For equities, this has helped ease valuation concerns that were percolating earlier in the year.”

Lots of earnings support

“Earnings growth topped 95% YoY and, beyond base effects, the level of earnings on the S&P 500 has surged more than 20% above pre-COVID levels. Combined with the decline in longer-term interest rates, this has helped justify the move in prices. And, it reinforces that, even as Main Street continues to face some challenges, big businesses that trade on the S&P 500 can still thrive.”

 

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