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.

Traders on the New York Stock Exchange floor © Spencer Platt/Getty Images
Bullish investors are shrugging off the threat of a rise in capital-gains tax
(Image credit: © Spencer Platt/Getty Images)

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.

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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.

Contributor

Alex Rankine is Moneyweek's markets editor