Before The Bell - The attention of Wall Street this week will be on Corporate America, as first-quarter earnings season, which began last week with reports from a number of the big banks, kicks into high gear. With the major equity averages fresh off of a bullish week of trading, and sitting at or near record highs, a strong showing from the corporate world may be needed to keep the good times rolling. The start of the reporting season, along with continued encouraging economic data, was the perfect cocktail for the bulls during the most recent five-day stretch of trading. This morning, a light one on news, will likely start with some modest profit taking after last week’s gains.

The first-quarter earnings season got off to a strong start, led by impressive reports from banking giants JPMorgan Chase (JPM) and Goldman Sachs (GS). In the case of the latter, it was a blowout March-quarter performance that caught the attention of Wall Street. The expectation is that this earnings season will be a good one, with estimates for the S&P 500 companies being raised leading into the start of reporting. Our sense is that with expectations for good results already baked into valuations, investors will be looking at guidance and outlooks as possible catalysts for stocks. Last week, the outlooks from the big banks were bright, with JPMorgan head Jamie Dimon saying that pent-up demand from COVID-19 disruptions will be realized in the second half of this year and in 2022. This week, the heavy slate of earnings reports will be highlighted by quarterly results from 11 Dow-30 companies.

Earnings season is not the only thing that is giving a boost to equities these days. Highly accommodative monetary policies from the Federal Reserve and unprecedented fiscal stimulus measures to combat the ills of the coronavirus pandemic are flooding the financial system with liquidity and providing support for equities. The investment community also has been quite pleased with the economic data of late. The month of April started with strong reports on job creation and manufacturing and nonmanufacturing activity, and built on those last week with impressive data on retail sales and housing starts, and the lowest reading on initial continuing weekly jobless claims during the COVID-19 pandemic. As we noted at the start of last week, the retail sales and homebuilding data would be closely watched, given how big of a contributor the consumer and homebuilding is to domestic output. The investment community clearly liked what they saw and bid stocks up from their already lofty perches. That said …

The news from the business beat will definitely take a backseat to earnings season this week. The week starts off with three quiet days before giving way to a few important reports from the housing market (i.e., existing and new home sales). The stocks of the homebuilding companies, which for the most part have performed well since their coronavirus-driven nadirs roughly 12 months ago, got a boost on Friday from the strong March residential construction data. This, along with the pullback in bond yields, was a good combination for the housing-driven sectors. 

The retreat in Treasury market yields—the rate on the benchmark 10-year Treasury note, which is used to set rates for longer maturity bonds, sits at 1.57% after peaking around 1.75% earlier this month—also has been good news for equity investors. Concerns about inflation, which also brings talk about the Federal Reserve possibly—but unlikely right now—reversing its stance on monetary policy, has historically not been a great backdrop for stocks. Higher bonds yields also makes fixed-income investments more attractive and creates competition for stocks, especially for those seeking income. The 10-year Treasury bond, before the recent backtracking, stood not too far below the Value Line median dividend yield. The recent retreat in bond yields, though, has brought renewed interest in the high-growth stocks in the technology heavy NASDAQ Composite and the small-cap Russell 2000. For those with an eye on small- and mid-cap stocks, our weekly Small and Mid-Cap Portfolios may be of interest. Investors should also be aware that Value Line recently launched The Aggressive Growth Model Portfolio, which can be found in the weekly print edition and also is available on valueline.com with a subscription to The Value Line Investment Survey.

Before the market open, the equity futures point to some modest profit taking following last week’s gains. There is not much in the way of earnings and economic news today, save for results from beverage giant Coca-Cola (KO), which may bring the attention of Wall Street to President Biden’s infrastructure agenda. Overall, investors should note that market volatility has eased considerably in recent sessions, with the CBOE Volatility Index (or VIX) hovering near a 14-month low. This also suggests the market is overbought and against that backdrop, the earnings and economic data will likely need to stay positive for the bulls to remain emboldened. Stay tuned. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.