by Bryan Perry

May 4, 2021

With the month of May just beginning – and already getting plenty of scrutiny as to whether investors should “sell in May and go away” – it seems pretty clear to me that, based on how well a number of fluid factors are playing out, the S&P 500 is ripe for advancing another 10% from its April 30 level of 4,181.

Sure, a 5% pullback below 4,000 is quite possible – and more likely probable, in that the narrative of the past week was to sell on the earnings news, regardless of the blowout numbers crossing the tape.

Even (AMZN) finished in the red after hitting fresh record highs and crushing first-quarter estimates while issuing above-consensus revenue guidance for the second quarter.

Navellier & Associates does own (AMZN), in a few managed accounts, per client request.  Bryan Perry does not own (AMZN) personally.

Heading into May, the current year-to-date returns are solid, with small caps leading the way:

Performance: Year-to-Date, April 30, 2021
Russell 2000 +14.8%
S&P 500 +11.3%
Dow Jones Industrials +10.7%
Nasdaq Composite +8.3%
Source: Wall Street Journal, May 1-2, 2021

It was widely broadcast that traders and investors were looking to book profits on gap-higher moves related to big-time earnings beats and, in many cases, that’s how most of the leading stocks traded. Stocks gapped higher at the opening on quarterly reports posted after the previous night’s close, or those posted in the pre-market hours, and we saw selling pressure in nearly every case.

This has been the pattern of the past three weeks, ever since earnings season opened with the big banks in the week of April 12-16. Initially, profit taking hit the banks – but now they are hitting new highs.

Standard and Poor's 500 Financial Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The current two-week consolidation trend follows a five-week stretch in which the S&P 500 gained roughly 8% going into earnings season. Thus, with the peak growth narrative and sideways activity in mind, investors presumably felt uneasy about buying in front of a potential pullback, and when the gap higher didn’t hold, that triggered widespread knee-jerk algo-related selling.

The main point of contention at present is whether this market landscape is a “pause that refreshes” during a primary bull trend or whether May could be a month where stocks correct more than a garden-variety 5% pullback. The relatively disappointing price action fed into the “peak growth” narrative, which says the market will find it harder to keep rallying when GDP growth rates and earnings growth might moderate in the second half of the year following the monster year-over-year comparisons in Q1 and Q2.

But before getting too deep into the “narrative” weeds, the data argues well for the “pause that refreshes” scenario. The U.S. economy is driven by consumer spending, which accounts for 70% of GDP, and the final April reading of the University of Michigan Index of Consumer Sentiment increased to 88.3 (vs. a consensus prediction of 87.0) from the preliminary reading of 84.9. The final reading for March was 84.9.

The key takeaway from the report is the fact that an all-time record number of consumers expect the jobless rate to decline in the year ahead, which is important as it relates to spending potential.

This is pretty huge in light of the new stimulus proposals being advanced by the Biden administration, where the $1.9 trillion Covid Relief Bill, the $2 trillion American Jobs Plan, and the $1.8 trillion American Families Plan are either active or being advanced.

This total of $5.7 trillion in proposed new spending pairs up with the Fed’s latest policy statement, reiterating that it will not change its monetary policies until “substantial further progress” is made toward achieving maximum employment and price stability. At this point, Fed Chair Powell says it is “not time yet” to begin tapering asset purchases, meaning that the Fed’s plan is still in place for the balance of 2021.

Another catalyst for a 10% higher move in the market is the analysts’ expectation of double-digit earnings growth for the remaining three quarters of 2021. Overall, 60% of the companies in the S&P 500 have reported results for Q1. Of these, 86% have reported EPS above estimates, vs. a five-year average of 74%.

If 86% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. Companies are reporting earnings that are 22.8% above the estimates, which is well above the five-year average of 6.9%.

Strong Q1 performances, coupled with bullish corporate guidance has Credit Suisse raising their earnings outlook for the S&P to $200 in 2021 and $215 in 2022. To reach 4,600 on the S&P 500 by year-end 2021 only requires 21.4 times 2022 earnings (see “Earnings Are Just Too Good to Ignore,” Barron’s, April 30).

For those seeking technical assurance, the six-month chart of the SPY shows the index breaking above its channel trendline. We could see the market chop around for a month or so, but a rising 50-day moving average (orange) should provide solid support at 4,000 if the market violates the 20-day moving average.

Six Months of Standard and Poor's 500 Financial Sector Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Within the debate over the market’s near-term outlook, the Goldilocks catalyst will be influenced by how future corporate taxes are structured. It is likely that after all the Super PACs weigh in, the new corporate income tax rate will likely be around 25%. Reuters interviewed more than a dozen corporate and White House officials engaged in the infrastructure push. Most expect the White House and business groups to compromise on a 25% corporate tax rate, a level neither side would have chosen, but both can live with.

If so, the stock market will likely receive this news well. U.S. Senator Joe Manchin, Democrat from West Virginia, whose support is crucial to any bill passing in the 50-50 Senate, said he could support a rate of 25%. I don’t think the market gives two shakes about whether individuals making over $1 million a year have to pay more in capital gains tax. The big story here is seeing the corporate reset at a rate below 28%.

I’m looking for the narrative to quickly shift from “selling the news” to “buying the dip” as the tax debate takes on more clarity. If the tax hit to corporations is negotiated at a lower level than what is currently being proposed, then I agree with Credit Suisse that 4,600 for the S&P is a “done deal” by year-end.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Another Rising-Rate Rotation Coming

Sector Spotlight by Jason Bodner
Beware of “Things You Know that Just Ain’t So”

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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