Stocks rose again last week, supported by better-than-expected earnings and improving global economic conditions.

While the spread of the virus remains a concern, we are confident that massive government stimulus will continue supporting the economy until the pandemic fades. Second-quarter earnings results support our positive outlook for Technology and Health Care, while improving global manufacturing conditions support our positive outlook for Industrials (discussed below).

Global Manufacturing Sees First Expansion Since January

The J.P. Morgan Global Manufacturing PMI (a global business survey) moved back into expansion territory in July, as output and new orders started to revive following the slump caused by the coronavirus outbreak. Business sentiment also started to recover, hitting a five-month high. We are encouraged by improving readings from China, Europe, and the U.S., which suggest a synchronized global expansion is underway. These improving conditions are being supported by massive government stimulus and aggressive central bank monetary policy across the globe.

Follow-on Coronavirus Aid Package

Democratic leaders and White House officials continue to meet about the next coronavirus aid package. Differences remain on whether to cut the $600-per-week jobless supplement or provide aid to financially ailing states and localities. In May, House Democrats passed a $3.5-trillion package that included $1 trillion for municipalities and extended the $600 weekly jobless supplement through January.

Senate Republicans last week proposed an alternative, a roughly $1-trillion measure that would cut the supplement to $200 a week before shifting to a system that would provide enough money, when combined with state benefits, to cover 70% of a worker’s prior wages. The Republican plan omitted money for states and cities, although it would grant municipalities more flexibility in using federal aid that was appropriated in an earlier relief package. We expect a package of at least $1 trillion will be agreed upon in the coming days. We also expect these aid packages will continue until the impact of the pandemic subsides.

Earnings Are Better Than Expected

Over 300 companies within the S&P 500 have reported second-quarter results so far. Earnings have exceeded estimates by 23% in aggregate, with 81% of the reported companies beating their lowered projections. These numbers are exceeding expectations by much more than usual and show that analyst estimates were too negative for this highly uncertain quarter where many firms withdrew earnings guidance.

Earnings for Technology (especially mega-cap tech) and Health Care are leading the market and this supports our positive outlook for these sectors. The cyclical sectors (Energy, Materials, Industrials, Financials and Discretionary) have seen their earnings deteriorate significantly as a result of the pandemic. However, with the worst of the economic contraction behind us, these sectors should show significant improvement in the coming quarters.


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