US stocks have a spring in their step

US stocks enjoyed their best week in three months last week, with the S&P 500 advancing 3.8% despite deadlock in Washington over a new stimulus bill.

On Monday, the Nasdaq index had its best day since April. The rising odds of a clear victory for Joe Biden and a Democratic blue wave (see cover story) have raised hopes of a post-election stimulus binge. 

The new mood is especially evident in the Vix index, the “so-called stock market fear gauge”, says Randall Forsyth in Barron’s. It has retreated below 25 from almost 30 earlier this month. That comes despite the fact that Biden is proposing a rise in capital-gains tax. JPMorgan strategist Nikolaos Panigirtzoglou notes that previous hikes in 1986 and 2012 delivered a roughly 5% hit to American stocks. 

Perhaps even more surprising, tech stocks are once again leading the rally in the face of intensifying antitrust pressure, says John Authers on Bloomberg. Apple shares were up by 6.35% on Monday. The tech stock surge in August was accompanied by rising demand for call options, a sign that investors are making big leveraged bets on the sector. That period was followed by a sharp pullback in tech the following month. Now, once again, options activity is on the rise. 

US investors also have the start of the third quarter earnings season to keep an eye on, says Russ Mould of AJ Bell. The expectation is that the second quarter was the bottom for corporate earnings. Analysts are forecasting an 18% quarter-on-quarter rise in earnings per share. 

That would still leave S&P 500 earnings 21% lower than this time last year but would suggest that things are going in the right direction. Yet on a cyclically adjusted price/earnings (Cape) ratio of more than 30, S&P 500 shares are very expensive, so the long-term outlook is uninspiring.

Recommended

US stockmarkets shrug off the mob's rampage through the US Capitol building
US stockmarkets

US stockmarkets shrug off the mob's rampage through the US Capitol building

US stockmarkets seem more interested in the results of Senate elections in Georgia than on the lawless mob's raid on the country's Capitol building.
14 Jan 2021
When will the US stockmarket bubble burst?
US stockmarkets

When will the US stockmarket bubble burst?

With US stocks more expensive than before the Wall Street crash of 1929, there are growing signs of “mania”. But what will push markets over the edge?
22 Jan 2021
DoorDash won't deliver for investors. Here's how to short it
Trading

DoorDash won't deliver for investors. Here's how to short it

American food-delivery app DoorDash can’t even make money in a pandemic. Matthew Partridge explains the best way to short it.
20 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021