Wall Street Close: Strong day for stocks as Yellen boosts stimulus hopes

It was a strong day for US equity markets; the S&P 500 closed 0.8% higher and just failed to close above the 3800 mark. Meanwhile, the Dow ended the session 0.4% higher, the Nasdaq 1.5% higher and the Russell 2000 1.3% higher.

Yellen bolsters stimulus, inflation hopes

Markets seemed to like the tone of remarks from US Treasury Secretary nominee Janet Yellen, who used her confirmation hearing in front of the Senate Finance Committee to bolster the case for additional fiscal stimulus under the incoming Biden administration.

Inflation expectations rose (5-year break-evens rose about 3bps to nearly 2.14%, 10-year break-evens rose about 2bps to just under 2.09% and 30-year break-evens rose just over 1bps to just over 2.11%) and US real yields dropped (the 10-year TIPS dropped 1.3bps to -1.028% and the 30-year TIPS dropped 1.2bps to -0.285%) on Monday, indicating that markets 1) expect all the incoming stimulus advocated for by Yellen will boost inflation and 2) do not expect additional debt issuance to fund the Biden administration’s stimulus to trigger a tightening of US financial conditions, likely given continued support (via asset purchases and low rates from the Fed).

This is, of course a bullish combination for stocks; higher inflation (as long as it is not economically damaging higher inflation) is generally a positive for stock prices; companies can raise prices which raises nominal earnings (though the purchasing power of these earning would be unchanged), thus raising the stock price (which is also nominal). Meanwhile, continued easy financing conditions of course also pumps higher stock prices.

Netflix

Netflix earnings just came out; earnings per share missed expectations coming in at $1.19 versus expectations for $1.38 per share. Revenue was a little better than expected at $6.64B for the quarter, however. Most importantly, in Q4 the number of paid streaming accounts rose 8.51M, well above expectations for a rise of just over 6M. Netflix shares were up as much as 11% in post-market trade.

Banks underperform despite strong earnings

Bank of America and Goldman Sachs both reported earnings prior to the market open on Tuesday; both beat earnings per share expectations, with the latter more than doubling profits amid a strong performing in trading and a surge in IPO underwriting fees. However, BoA dropped 0.8% on the day and Goldman dropped 2.3%.

David Wagner, portfolio manager at Aptus Capital Advisors said that, despite the downside seen across bank shares, “there wasn't really any disappointment in these earnings… the pullback shouldn't be a shock considering the significant outperformance banks have had compared to the general market indexes in Q4 and thus far in Q1."

Market commentators point out that a key factor driving Q4 EPS surprises from the banks emanated from their ability to reduce cash reserves more than expected. These cash reserves had grown substantially since around the time of the height of the pandemic mid a fear of an incoming wave of bad loans.

But Wagner sees this reduction in reserves as key factor behind his bullish outlook for 2021; “banks are sitting on a lot of capital right now that they can deploy into loan growth to continue to expand EPS” he noted.