Overview: It was an uneven week for global stocks, as volatility continued in the markets. For the past week, the S&P 500 index was down -2.5%, while international developed stocks (MSCI EAFE) notched a positive 1.5% return. The sell-off in U.S. stocks was broad-based, with energy and tech stocks leading the decline. Markets reacted to the lack of an agreement on fiscal stimulus, as well as ongoing concerns with China, including an expanded list of banned Chinese technology exports. In Europe, the direction of Brexit negotiations remains a key concern on the minds of investors. In bonds, yields continue to trade in a narrow range, with the 10-year Treasury finishing the week at 0.67%. This week, investors will be focused on the Federal Reserve meeting that will take place on September 15-16. Market participants will pay close attention to any change in forecasts and will look for signs of any shift in support for the financial markets.
A note on stocks: (commentary from JP Morgan) The roller coaster ride in equity markets over the past couple of months has been driven in large part by a handful of technology stocks. While this dynamic has pushed U.S. markets to all-time highs and valuations to extreme levels, we do not see the same fundamental challenges today as were present prior to the tech bubble. Despite the pandemic, technology earnings rose 0.5% year over year in second quarter 2020 while overall S&P 500 earnings contracted by roughly 27% on a proforma basis. In contrast, in 2000 the sector contributed roughly 16% to earnings, yet earnings contracted severely through the first half of 2001 before turning negative by the third quarter. In addition, and as highlighted, free cash flow margins reveal the sector’s far better operating performance relative to the broader market. By expanding into software and away from hardware, technology sales growth has accelerated, leading to cash-rich balance sheets. Free cash flow margins have expanded from less than 5% in the aftermath of the tech bubble to over 23% today. Looking ahead, the outlook for technology earnings remains positive and momentum could continue to push the market higher in the short term. With that being said, however, a more broad-based market recovery across other sectors will be needed to sustain the rally over the medium to long term.
Weekly Returns and Data
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