Economic data from last week helped support a promising outlook for economic growth. Robust March retail sales growth of 9.8% month over month was well above consensus expectations of 5.5% and brought the three-month average to 4.9%. Strength across major spending categories gives us confidence on consumer demand as the economy gradually reopens.
Although currently paused for further review, Johnson & Johnson COVID-19 vaccines have comprised less than 5% of total U.S. doses to date and appear unlikely to meaningfully slow broader U.S. vaccination efforts or economic reopening. However, this incident is a stark reminder that COVID-19 still presents a significant tail risk to the ongoing global economic recovery.
Domestic equities continued their strong gains, with large- and mid-cap benchmarks hitting new highs for the week. Bullish retail sales data drove optimism about economic growth, while unfavorable reactions to earnings reports led value to underperform growth for the week.
The MSCI World ex USA Index slightly outperformed domestic equities. Consumer Discretionary was the strongest contributor to performance after LVMH Moët Hennessey Louis Vuitton SE delivered a strong quarterly sales update, lifting other luxury goods manufacturers. Other cyclical sectors rallied as well on optimism for favorable economic growth.
The MSCI Emerging Markets Index was in line with domestic equities, with cyclical sectors leading performance. Chinese technology-related companies were mixed after the government announced intentions to increase anti-competitive oversight on a broad group of companies. However, Alibaba Group Holding Ltd. rallied after the fine imposed was less than anticipated and no major structural adjustments were mandated by the government.
Fixed Income Markets
Treasury rates declined to their lowest level in a month as the latest Treasury International Capital Report (TIC) showed a significant increase in foreign demand, especially out of Japan and China. With $13.8 trillion in global negative yielding debt and improving growth, we would expect ongoing foreign demand.
Table of the Week
First-quarter earnings season kicked off last week, with 43 S&P 500® constituents having now reported. The blended earnings growth rate (actual growth rate combined with consensus estimates) is 30.2%, a noteworthy move higher from the 23.6% growth rate expected at quarter end.
The Financials sector drove blended growth higher for the week, with every reported company beating consensus expectations. While there was an increase in fee-based income and capital markets activity, net interest margin compression remains an issue for the sector and thus the primary driver of results for Financials has been reserve releases. As such, over half of the Financials that reported were down on their respective earnings day in spite of those outsized beats. The Industrials sector saw its blended growth rate decline after Delta Air Lines Inc. missed consensus estimates, dragging the airlines industry lower.
Second-quarter earnings revisions have increased to 54.6% from 52.4% at the end of the first quarter. The consensus estimate for earnings growth for the 2021 calendar year has improved to 27.9%, the highest estimate since last July.