Read for 4 minutes (Reuters) – NEW YORK (Reuters) – In the first half of 2021, investors were rewarded with a rewarding ride, as unprecedented economic stimulus, stellar earnings growth, and a reopening U.S. economy propelled the S&P 500 to new highs and a 14 percent year-to-date gain, putting the index on track for a first-half performance only seen once in over two decades. PHOTO FROM THE FILE: On March 6, 2020, trading data is displayed on screens at the Nasdaq Market Site in Times Square, New York City, New York, United States. ANDREW KELLY/REUTERS Investors are looking at a number of patterns for hints on how asset prices will behave in the second half of the year, including rising inflation, concerns about a faster-than-expected rollback of the Federal Reserve’s bond-buying program, and projections of an economic growth peak. Graphic: It’s hard to believe. -SURPRISES IN ECONOMIC DATA While analysts have cited the strength of US economic data as a primary driver of stock market gains, future data may find it more difficult to beat expectations as the economy returns to pre-pandemic growth levels. The Citigroup U.S. Economic Surprise Index, which gauges how far data beats or misses experts’ predictions, is now at 16.4, down from a record high of 270.8 in July of last year. According to I/B/E/S data from Refinitiv, earnings growth is likely to decrease after a remarkable first-quarter rebound, with third-quarter earnings growth forecasted to be 24.2 percent, down from 64.0 percent in the second quarter. BULLISH SENTIMENT IN CHECK -BULLISH SENTIMENT IN CHECK -BULLISH SENTIMENT IN CHECK -BULLISH SEN Even as markets reached record highs, investor optimism for stock price performance over the next six months has waned in recent weeks. According to an American Association of Individual Investors poll, about 40% of respondents anticipate equities will rise in the next six months, down from 56.9% in mid-April. Some experts see this as a favorable sign for equities, because excessive bullishness compared to bearishness can indicate that the market has become overbought and is about to correct. YIELD DIFFERENCE -YIELD SPREADS -YIELD DIFFERENCE -YIELD SPREADS – Investors are also keeping an eye on the US dollar, which gained 2.5 percent against a basket of currencies in June after the Federal Reserve made an unexpectedly hawkish shift at its monetary policy meeting. Despite the fact that Treasury yields have been falling since a wild rise in the first quarter of the year, the spread between the benchmark 10-year US Treasury and its German counterpart of the same maturity remains near pre-pandemic levels. This increases the dollar’s allure to yield-seeking investors, potentially supporting the greenback in the second half of the year. -INFLATION WATCH -Graphic: Grinding higher Inflation, and whether the Fed will rein it in by unwinding its loose money policies sooner than expected, is one of the most important factors influencing investors’ outlook for various assets. As predictions of rising prices have grown, U.S. breakeven inflation rates – the difference in yield between a nominal Treasury bond and a Treasury Inflation-Protected Security (TIPS) of the same term – have risen. GROWTH PLAYS CATCH-UP -GROWTH PLAYS CATCH-UP -GROWTH PLAYS CATCH-UP -GROWTH PLAYS C UPA’s rally in growth companies since the beginning of the second quarter has narrowed the performance gap between these and so-called value equities, which have raced upward in 2021 after years of underperformance. Concerns about a more hawkish Federal Reserve and the failure of U.S. bond yields to maintain their stunning first-quarter advance have boosted growth stocks and impacted on value in recent weeks. Saqib Iqbal Ahmed contributed reporting from New York, while Ira Iosebashvili and Matthew Lewis edited the piece. Continue reading
