Stock futures opened slightly higher Wednesday evening, extending a streak of range-bound trading as investors await the start of first-quarter earnings season to confirm the boost to corporate profits expected against an improving economic backdrop.
During the regular session Wednesday, the Dow, S&P 500, and Nasdaq ended near the flat line. The S&P 500 got a small boost after the Federal Reserve signaled in its March meeting minutes that most monetary policymakers favored keeping monetary policy highly accommodative as the economic recovery continues, signaling that they will hold off on tightening at the first signs of inflation during the rebound.
“A big part of this is making sure the vaccine-led recovery is firmly rooted, and that won’t be clear until somewhere in the second half of this year. So it’s possible that as we look out to the late summer timeframe or early fall that that’s something that we could consider at that point,” Jeffrey Kleintop, Charles Schwab chief global investment strategist, told Yahoo Finance. “But until then, there’s still a lot of risks. and just to backtrack it, we know that monetary policy works with a lag, and so it makes more sense to ensure that we’re on solid footing before you begin to take your foot off the pedal.”
In absence of any notable economic data reports or earnings releases this week, investors have fixed their focus to next week, when corporate results for the first three months of 2021 will begin to trickle in. Earnings estimates have been revised up by a record margin over the past several weeks as analysts took into account the expected earnings growth coming alongside increasing economic growth. Cyclical stocks like financials and energy names, which have profits closely linked to the pace of the economic recovery, have been among the biggest recent beneficiaries.
“We’re still in probably the early parts of the expansionary cyclical after recovering from that recession,” Omar Aguilar, Charles Schwab chief investment officer of passive equities and multi-asset strategies, told Yahoo Finance. “We’ve started to see cyclical trades playing a big role in the early part of the cycle. Normally what happens at this stage is you continue to see … the cyclical component will continue to drive leads into the second part of this year into next year.”
At the same time, however, other strategists warned that much of the recovery may already be priced into U.S. equities. And as expectations rise, earnings will need to clear an even greater hurdle in order to impress Wall Street and push stock prices up further.
“As bottom-up S&P 500 Q1 and 2021 EPS estimates saw some of the biggest increases on record during the first three months of the year. The price strength exhibited in U.S. equities left the S&P 500 just 3.1% off our 2021 year-end price target with risk to our target now slanted to the upside,” Brian Belski, BMO Capital Markets chief investment strategist, wrote in a note. The firm maintained its 2021 price target of 4,200 on the S&P 500.
“We believe investors should be prepared for a second half of the year that will likely be weaker in terms of price gains compared to 1H as the reopening and cyclical trade matures and investors start to digest the implications of an EPS-driven environment,” Belski added.