The Dow Jones, the S&P 500 and the Nasdaq have been extremely volatile in the last three weeks, reacting to news about President Biden’s proposed capital gains tax, Treasury Secretary, Yellen’s comments on inflation, Elon Musk’s tweets about bitcoin, and weekly unemployment reports. Investors have been on a rollercoaster ride, wondering whether the dreaded stock market slump is on the horizon.
Are Stocks Going Up Or Down?
The Dow rose yesterday in response to job data showing that unemployment claims dropped to 444,000 in the week ending May 15. The Biden White House announced increased regulations on cryptocurrency transactions, causing the price of bitcoin to fall. Furthermore, technology stocks recovered yesterday, with Microsoft MSFT (MSFT) and Apple AAPL (AAPL) leading the bulls.
The coronavirus pandemic has turned the world upside down and has had a major impact on stock market earnings.
The implementation of a successful vaccination campaign has resulted in a reduction in daily Covid cases in the United States. As of May 20, there have been 33,833,181 cases and 602,616 deaths, according to the worldometers website. According to the CDC, approximately 38.1% of the American population has been fully vaccinated, and 48.2% has received at least one dose.
What Is A Stock Market Crash?
A stock market crash occurs when stock prices fall suddenly and unexpectedly. A major economic downturn, a catastrophic event, or the bursting of a long-term speculative bubble can all trigger a stock market meltdown. It is more severe than a market correction, which occurs when an index goes down 10% from its 52-week high.
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The Nasdaq Composite index falling below the 50-day stock market average is the most telling sign of bubble trouble. This suggests that investors have lost faith in Big Tech and that a stock market meltdown is imminent.
The Nasdaq rose by 1.7% yesterday, assisting the market in recouping losses from the previous three days. It is now moving towards the 50 day line, which is a key technical level as discussed above.
Current Situation of U.S. Stock Markets
Earnings per share (EPS) for 90% of the S&P 500 companies increased by 46% year on year (YOY), rather than the expected 20%. 68% outperformed the consensus by one standard deviation. Financials and consumer discretionary both experienced 135% and 187% EPS growth, respectively. Despite the strong performance, the broader markets are down from a month ago. That is because markets had already anticipated earnings growth and the fear of rising inflation.
Current Situation of Stock Markets
In the short term, experts are optimistic, because they expect financial institutions, such as Morgan Stanley MS and JP Morgan, and Big Tech, such as Amazon AMZN and Google, to post extraordinary financials in the coming quarters. The $12 revision in EPS is primarily driven by a $7 growth in financials and $3 growth in Big Tech. The issuance of $10 billion in reserves has benefited financial institutions. Likewise, the coronavirus pandemic has helped Big Tech companies to increase sales by 19% and post margins of 24.2% within the last quarter, pushing profit margins of S&P 500 to a record high of 11.6%.
President Biden’s Proposed Capital Gains Tax
Analysts are less optimistic about EPS growth in 2022 because of President Biden’s proposed increase in capital gains tax. They expect EPS to rise to $202, which is significantly lower than the $209 consensus. The estimate assumes that the federal statutory corporate tax will be raised from 21% to 25%, and that the tax rate on foreign income will also rise.
Outlook For 2021
Analysts have raised their EPS forecast for 2021 from $181 to $193, and for 2022 from $197 to $202. Increased consumer savings, global economic recovery, solid operating leverage and GDP growth are driving the revision. Experts predict that GDP will grow by 7% in 2021 and 5% in 2022, while EPS will grow by 35% in 2021 and 5% in the following years, as GDP returns to normal levels.
Overall, the second quarter’s earnings season has shown strength . There is a strong possibility that in the third quarter we may see a bit more strength but the momentum in economic growth is likely to slow significantly in comparison to the previous quarters. This could create a panic in terms of valuation and the stock market bubble could pop.
Having said that, if the employment market continues to show more strength, we could see more consumer spending, and that could boost the outlook for the remaining quarters. Under those circumstances, we could see the U.S. stock market to continue to soar, and traders may never see a stock market crash but only minor retracements in the Dow Jones, the S&P 500 and the Nasdaq.
The Bottom Line
Although it is believed that the momentum of growth, witnessed during late 2020 and early 2021, will fade away, equity markets are still expected to grow, providing opportunities for investors to earn the profits they desire.