Cyclical stocks led the market on Tuesday, as defensive and growth sectors declined. Investors continue to rotate into areas like energy, financials, and consumer discretionary ahead of an expected vaccine-driven recovery in the global economy. Forecasts of additional large fiscal stimulus from the next administration have further boosted the rotation over the past week.
The Dow Jones Industrial Average was up 21 points, or less than 0.1%, on Tuesday morning. The S&P 500 ticked up 0.2% and the Nasdaq Composite gained 0.3%. The small-cap Russell 2000 index jumped 1.2%.
Fourth-quarter earnings season begins later this week, with several large banks kicking things off as usual. Wall Street expects S&P 500 earnings to be 12% lower in the final three months of 2020 versus the same period in 2019, according to data from Bloomberg. Sales are expected to decline 6%.
The scrutiny will be much higher for defensive and relatively pandemic-proof sectors like consumer staples or technology. Those companies’ fundamentals have held up or improved during the pandemic, and investors will want to see that continuing in the fourth quarter. For the cyclical and economically sensitive companies that have led the market since the fall, some signs of progress or optimistic management commentary about the post-pandemic future should suffice.
JPMorgan Chase (ticker: JPM), Wells Fargo (WFC), and Citigroup (C) will all report on Friday. Other results this week will come from IHS Markit (INFO) on Wednesday and BlackRock (BLK), Delta Air Lines (DAL), and Taiwan Semiconductor Manufacturing (TSM) on Thursday.
In Asia, Tokyo’s Nikkei 225 rose 0.1%, while Hong Kong’s Hang Seng ticked up 1.3%. The Shanghai Composite Index rose 2.2%. In London, the FTSE 100 was down 0.5%. Paris’ CAC 40 and Frankfurt’s DAX were both down about 0.1%.
The U.S. political climate hasn’t dented the market’s rally. Articles of impeachment against U.S. President Donald Trump are under way in the House, and officials have expressed concern about the potential for additional violence or attacks on government property in the remaining nine days of Trump’s term.
But as long as vaccine distribution continues uninterrupted, fiscal stimulus appears likely, and the path to a global economic recovery remains clear, the overall stock market will be biased upward.
Individual companies might be impacted, however. The Nasdaq dropped on Monday, with shares in Facebook (FB) and Twitter (TWTR) under pressure after they implemented bans on Trump following the storming of the U.S. Capitol. The social-media platforms’ stocks were falling again on Tuesday, with Facebook down 1.1% and Twitter down 0.6%.
“Facebook and Twitter have found themselves in a political crossfire by blocking U.S. President Trump from their platform, which also weighed on the Nasdaq index,” said Milan Cutkovic, an analyst at Axi. “The question whether big tech has become too powerful is likely to lead some heated discussions in the coming weeks.”
With the inauguration of President-elect Joe Biden just a week away, markets are eagerly anticipating a new round of fiscal stimulus to help balance the economic effects of the Covid-19 pandemic. U.S. Treasuries have reacted in kind, with the 10-year note rising to its highest level since the pandemic began—up 4 basis points to 1.17% on Tuesday.
“The caution being exhibited this week seems entirely sensible, particularly so given the strong start to the year, and when set against the sharp rise in yields seen in the past few days, which has made long term U.S. Treasuries slightly more attractive,” said Michael Hewson, an analyst with CMC Markets.
The price of crude oil continued to rise on Tuesday, with WTI crude, the U.S. benchmark, up 1.1% to $52.80 a barrel. Oil stocks were up, with the Energy Select Sector SPDR ETF (XLE) rising 3.1%. ConocoPhillips (COP) gained 3.3% after Mizuho upgraded the stock to Buy from Neutral and raised its price target to $56 from $36.
Taiwan Semiconductor Manufacturing stock rose 0.5% ahead of the world’s largest contract chip maker’s earnings report later this week. Analysts expect net income to have risen near 50% in 2020 compared with 2019.
Moderna (MRNA), one of the biggest producers of the Covid-19 vaccine, says its vaccine should provide immunity for a year. This will satisfy investors if it means the globe can still reach herd immunity, which would catalyze reopening and help the economy return to pre-Covid levels. The stock gained 1.6%.
Wells Fargo rose 2.5% after UBS upgraded the stock to Buy from Neutral. Other bank stocks gained as well, with Bank of America (BAC) up 2.2%.
Albertsons (ACI) climbed 2% after beating estimates on revenue and earnings. The company reported adjusted earnings per share of 66 cents, beating expectations of 35 cents. Sales came in at $15.4 billion, better than the forecast for $15 billion.
Fortinet (FTNT) rose 3.2% after D.A. Davidson upgraded the stock to Buy from Neutral and lifted its price target to $170 from $130.