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The peak of the stock market? “Easy money” has been made, but there is room for more profits, strategists say

Another week of a boom in U.S. economic data and strong corporate profits, including outbursts by some of the world’s largest technology companies, is included, but stocks are still dealing only with mixed performance, fueling fears that market participants are already assessed in the post-pandemic economic boom.

“The way markets are behaving is related to investors’ concerns about whether easy money has been made,” said Saira Malik, chief investment officer of Nuveen’s $ 420 billion global division, in an interview with MarketWatch.

These fears are not necessarily misled. “A lot of easy money has been won,” Malik said, but there is still room for profit. However, investors will need to be more selective, focusing on companies and sectors that are more likely to increase expected profits, she said.

Connected: The stock market will struggle as profit expectations spiral out of control: the economist

Last week was hardly a disaster. The S&P 500 SPX index,
and Nasdaq Composite COMP,
both traded in record territory, but there had to be no breakthroughs. Dow Jones Industrial Average DJIA,
the week ended 0.5%, while the S&P 500 was almost flat and the Nasdaq Composite fell 0.4%.

The monthly performance was not for sneezing, as the S&P 500 rose 5.2% in April for its strongest month since November. The Nasdaq’s 5.4% rise for the month was the strongest since December. The Dow rose 2.7% in April.

The week ended with data showing a 21.1% increase in personal income in March, fueled by fiscal stimulus checks and accompanied by a 4.2% jump in personal expenditure. The following is an estimate of gross domestic product data, which shows that the US economy grew at a rapid 6.4% annual rate in the first quarter.

Read: Americans have several trillion extra savings to keep the economy strong

And strong economic indicators are almost certain to continue next week, with the Supply Management Institute releasing its April production index on Monday and its April service sector on Wednesday. Friday will bring the job report in May, with some economists seeing the potential for non-farm payrolls to increase by more than 1 million.

Questions about whether this is “as good as it gets” are understandable, given that thriving data, especially on purchasing managers’ indices, often portends a tightening of monetary policy by the Federal Reserve, leading to a slowdown, Quincy said. Crosby, chief market strategist at Prudential Financial, has $ 1.721 trillion in assets under management.

But the Fed remains committed to allowing the economy to boom, she said.

President Jerome Powell reiterated on Wednesday that it was too early to even consider withdrawing emergency measures to stimulate the central bank, arguing that signs of inflationary pressures remained “transient”. And while some employers are complaining of labor shortages, the job market is still far from shrinking as the economy continues to recover from the pandemic, he said.

Look: What’s next for the Fed? Signal for a “cone” from Powell at the end of August in Jackson Hole

The Fed’s retention is good for interest rate-sensitive stocks, especially consumer-related stocks, as the economy continues to open, Crosby told MarketWatch.

Travel and leisure stocks and some other consumer-oriented parts of the market “can still do extremely well,” she said. Add President Joe Biden’s infrastructure spending proposals and there’s room for industrialists, as well as clean energy names that have already done well, Crosby said.

Malik is also optimistic about consumer-oriented companies, while industrialists will benefit from continued economic growth and infrastructure costs. Financial firms must be prepared to exceed profit expectations and take advantage of higher interest rates as inflationary pressures push higher yields, she said.

Malik is also bullish on small-cap stocks. While Russell 2000 RUT with a small cap,
ahead of the larger Russell 1000 RUT,
with more than 2 percentage points a year so far, the small-cap index still seems undervalued, she said.

The 12-month price-earnings ratio for Russell 2000 was an 18-year low against the Russell 1000 at the end of March, Malik said, and record equity inflows over the past five months have gone almost exclusively to high-cap stocks. small capitals have insignificant outflows.

In the last month, small caps have been underperforming due to the growing number of COVID-19 cases worldwide, especially in Asia, and questions about whether economic recovery has been assessed, she said. But small limits must be able to take advantage of rising commodity prices and inflation.

And then there is politics. Shares shook on April 22 after a news report highlighted Biden’s plan to almost double the capital gains tax for investors making more than $ 1 million a year to 39.4 percent. But these losses were soon erased.

Investors generally appear concerned about Biden’s call for an increase in the income tax of the rich and an increase in the corporate tax. The stock market’s performance in the first 100 days of Biden’s rule, which lasted until Thursday, was among the best in any presidency.

This is partly because market participants expect repulsion from some Senate Democrats, where the party has a razor-sharp majority, to cut proposals, analysts say. Also, proposals to stimulate the cost economy are also expected to provide a lift to the economy and profits, especially for companies that will benefit from infrastructure costs and other programs.

But tax increases and the prospect of tighter regulatory controls will contribute to a more selective environment, more conducive to the choice of stocks and sectors, analysts say.

These factors and the fading of other “systemic winds,” such as falling interest rates, will contribute to a shift from a “everything is Wall Street-friendly” environment to a more differentiated environment, said Brad McMillan, chief executive. investment officer in the Commonwealth financial network in an interview.

Meanwhile, the market may withdraw, analysts say.

Given the range of profits, it wouldn’t be a shock to see investors scared of short-term, negative surprises on the tax front or talk about when the Fed will start cutting bond purchases, Crosby said, but added that at this point, ” all retreats are healthy. “

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