Investors continued to vacillate between optimism on economic recovery and fear that the very recovery would also portend higher inflation. For now, market narratives are still divided on whether the current high inflation rate is transitory or will be stickier than expected. The latter will force central bankers to start tightening monetary policies sooner than the prevailing expectations. As a result, markets are seeing more volatility. A case in point: After falling sharply the previous Friday, US stocks rebounded quickly at the start of last week — recouping all losses and then some.
Despite the sharp swings in sentiment, however, the broader market is moving inexorably higher. Notably, high-growth tech stocks seemed to have regained favour with investors, at the expense of value and cyclical stocks. The Nasdaq Composite index hit fresh all-time record-high levels last week. Meanwhile, the broader Standard & Poor’s 500 index is just a hair’s breadth away from its record high.
As we have written, the outlook for US stocks is positive in the short term given the pace and strength of the country’s economic reopening. States have been progressively lifting restrictions as vaccination rates rise. More than 53% of the US population have now received at least one vaccine dose, with 45% fully vaccinated.
Companies too have been releasing strong earnings results, with the majority beating market expectations in the latest reporting season. According to FactSet, for 1Q2021, the S&P 500 companies reported 52.5% y-o-y earnings growth, which is expected to expand by an even stronger 61.9% in 2Q2021. The robust numbers are driven, in part, by easy comparisons in 2020. Earnings per share (EPS) are currently estimated to grow 35% in 2021, which means they will exceed the pre-pandemic levels of 2019. Hence, despite stocks trading at record highs, forward price to earnings (PE) valuations for the S&P 500 remained within the 21 to 22 times range, as they had over the past year.
The Global Portfolio gained 0.8% for the week ended June 23. Unsurprisingly, tech stocks, by and large, fared comparatively well. ServiceNow (+7.9%), Adobe (+5.7%) and Microsoft (+3.1%) were the top gainers for the week.
Shares in Adobe hit a fresh all-time high last week after the company reported earnings results that blew past market expectations. Revenue grew 23% y-o-y, of which 91.8% is recurring income from subscriptions. Double-digit growth rates were recorded across all of its major business segments. The biggest revenue segment, digital media (creative cloud and document cloud), grew 25% y-o-y. The company also raised guidance for the current quarter.
Meanwhile, Microsoft hit a new milestone last week, becoming the second publicly listed US company — after Apple — to top US$2 trillion (S$2.69 trillion) in market capitalisation. Despite its size, revenue in 3QFYJune2021 was up 19% y-o-y while operating income and EPS grew 31% and 45% respectively. The company is very well positioned to capitalise on the unfolding secular digitalisation trend, which will underpin future growth.
It holds the second spot in public cloud computing (Azure), after Amazon Web Services, and is a leader in subscription-based cloud services (Office 365, Microsoft 365, Dynamics 365). In tune with its pivot to a subscription-based business model, Microsoft has also expanded its gaming business beyond consoles (Xbox) to a game streaming platform (xCloud and Game Pass subscriptions), including embedding cloud gaming software into smart TVs.
Meanwhile, the notable losers in our basket of stocks were Bank of America (-3.4%), Awanbiru Technology (-3.3%) and General Motors (-2.7%). Last week’s gains lifted total portfolio returns to 57.7% since inception. We are still outperforming the MSCI World Net Return index, which is up 51.7% over the same period.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Photo: Bloomberg
