[Good Morning Stock Market] Despite Delta Variant Spread... US Stock Market Keeps Running

Delta Variant Stimulates Stock Market Volatility... But Lockdown Measures Are Easing
US Growth Momentum Stalls... New Unemployment Claims Surge

[Image source=AP Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Although the COVID-19 Delta variant is spreading worldwide, the three major U.S. stock indices are hitting record highs. This is because the global economic recovery trend remains unbroken despite the virus spread. However, there are also analyses suggesting that the growth momentum of the U.S. economy is faltering.

The New York stock market all rose on the 23rd (local time), with all three major indices reaching all-time highs. On that day at the New York Stock Exchange, the Dow Jones Industrial Average closed at 35,061.55, up 0.68% (238.20 points) from the previous trading day. The S&P 500 index closed at 4,411.79, up 1.01% (44.31 points) from the previous session. The tech-heavy Nasdaq closed at 14,836.99, up 1.04% (152.39 points) from the previous day.

◆ Lee Kyung-min, Researcher at Daishin Securities = The spread of the COVID-19 Delta variant is stirring volatility in the global financial markets. However, the likelihood of global economic anxiety materializing is low. This is because there are no signs that the global economic recovery trend is weakening or shaking. Lockdown measures continue to ease, and economic activities are normalizing to pre-COVID-19 levels.

At the center of the surge in COVID-19 cases, the United Kingdom has declared a full lifting of lockdown measures. This is due to the vaccine's effectiveness, which has drastically reduced the proportion of severe cases and mortality rates. Countries with high COVID-19 vaccination rates are gradually choosing to coexist with the virus. As a result, global GDP growth forecasts continue to be revised upward.

(Provided by Daishin Securities)

◆ Seo Sang-young, Researcher at Mirae Asset Securities = Among S&P 500 companies, 24% have reported earnings, with the earnings surprise rate reaching 88%, significantly exceeding the five-year average of 75%. In particular, operating profits exceeded expectations by 19%, far surpassing the five-year average increase of 7.8%. Ultimately, S&P 500 operating profits improved by 74.2% year-over-year, an upward revision of 4.9 percentage points from last week's announcement. This is the highest level since the fourth quarter of 2009, which was 109.1%.

Most sectors have been significantly revised upward compared to last week, and as the earnings season intensifies, expectations for earnings are spreading further. Additionally, as companies like Snap and Twitter reported solid earnings based on a surge in advertising revenue, expectations for earnings improvements among online service-related companies such as Alphabet and Facebook have risen, causing related stocks to surge.

Meanwhile, the S&P 500 first-quarter margin rate recorded 12.8%, surpassing the 12.0% during the 2018 corporate tax cut. The margin rate also stood at 12.4% in the second quarter, indicating a high likelihood of sustained solid earnings. However, concerns about margin rate deceleration in the second half remain due to potential cost increases from supply chain issues, wage hikes, and rising freight costs. A notable feature of the recent earnings season is that many companies that recently reported strong earnings are expressing concerns about their earnings guidance.

[Image source=Yonhap News]

◆ Na Joong-hyuk, Researcher at Hana Financial Investment = The European Central Bank (ECB) decided, as expected, to maintain its benchmark interest rate and quantitative easing policy. However, it raised the inflation target from just below 2% to 2% for the first time in 18 years. This is interpreted as a declaration of intent to maintain a low-interest-rate stance without overreacting to temporary price increases and until the medium-term inflation target achievement is confirmed.

The U.S. Federal Reserve (Fed) is expected to face deeper dilemmas. Considering the ECB's stance, the temptation to postpone discussions on tapering asset purchases has increased. However, due to concerns about the credibility of monetary policy and the shock from the June consumer price index results after the June Federal Open Market Committee (FOMC) meeting, it will likely be difficult to persuade hawkish members. Especially since asset price increases, such as housing prices, may be a primary cause of inflationary pressure in the second half of the year, discussions on reducing mortgage-backed securities (MBS) are necessary.

The growth momentum of the U.S. economy is also faltering. The GDPNow estimate for second-quarter growth, which was 10.3% just before the June FOMC, dropped to 7.6% as of the 20th, falling short of Bloomberg's forecast of 8.5%. The threat of the Delta variant is not light either. As of the third week of this month, COVID-19 cases increased in 49 out of 50 states, and new unemployment claims rose by 51,000 to 419,000 compared to the previous week. This contradicts expectations that workers would return to daily life alongside vaccination efforts.