Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

Markets

Market scorecard as of close on Friday August 6, 2021.

Equity Indices	Level	1 week	YTD	52-week
S&P/TSX Composite	20,475	0.9%	17.4%	23.5%
S&P 500	4,437	0.9%	18.1%	32.5%
NASDAQ	14,836	1.1%	15.1%	33.6%
Euro Stoxx 50	4,175	2.1%	17.5%	28.8%
Hang Seng	26,179	0.8%	-3.9%	5.0%

Source: Bloomberg, RBC Wealth Management

• TSX finished higher in Friday trading, just off best levels, to close at a new record high. Financial, energy and health care the leaders, with materials and utilities the laggards. US equities finished mostly higher in what was a largely uneventful session following the morning's release of better-than-expected payroll numbers

• The U.S. equity market has continued to drift higher despite a wall of worry: delta variant headwinds, the recent plunge in Treasury yields, ongoing inflation and supply chain challenges, and uncertainties about the economic recovery. This behavior isn’t that counterintuitive once we consider the one factor that sets the tone for equity performance—corporate profits.

• The sectors with the most positive aggregated bottom line results include Consumer Discretionary, Financials, and Communication Services. These sectors are all seeing quarterly results at least 20% higher than original consensus expectations. Meanwhile, Utilities, Materials, and Health Care are experiencing the smallest surprise factors, albeit all of them are indeed beating consensus expectations.

• Investors seem more focused on what truly makes the market tick over the long run—corporate profit growth. The unusually strong Q2 earnings season and constructive outlooks from management teams have helped the S&P 500 inch up to a new all-time high. With 85 percent of S&P 500 companies having reported results so far, Q2 earnings growth is at an impressive 93 percent year-over-year.

• But a market pause or pullback would be normal. RBC Capital Markets, LLC’s Head of U.S. Equity Strategy Lori Calvasina points out that periods of peak earnings growth are often accompanied by a loss of price momentum for the market. In the early stage of the past three bull market cycles going back to 1993, the S&P 500 declined by a range of one percent to 7.6 percent in the six months following the peak rate of earnings growth.

• The effect was temporary, as the S&P 500 eventually resumed its upward trajectory in each of the three instances, climbing a total of 26 percent to 50 percent during the 36-month period following the peak in earnings growth.

 

Economy

Canada

• Tight demand and supply dynamics continue to support the rich valuations of the Canadian housing market. Prices remain elevated across core geographies and housing type, but we note that RBC Capital Markets sees detached home demand potentially softening up whereas condo demand is showing early signs of acceleration. Overall, RBC Capital Markets believes housing prices will likely remain elevated due to factors such as strong consumer demand, weaker inventories, and accommodative credit conditions, which in turn should benefit the mortgage industry.

• Statistics Canada reported that real GDP declined 0.3% in May after falling 0.5% in April. With the recent easing of public health measures in multiple provinces, Canadian economic output most likely rebounded in June, as Statistics Canada’s preliminary estimates are indicating a 0.7% rise in real GDP over the month, supported by a recovery in the hospitality segments.

• This estimate puts GDP on track for a 2.5% annualized gain in Q2, short of RBC Economics’ forecast of 3.5%. However, RBC Economics expects output to accelerate in the second half of the year as industries in the services sector continue their upward trajectory.

U.S.

• Economic data last week continued to indicate an ongoing expansion, despite a few releases that slightly missed consensus expectations. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) result for July showed a robust expansionary reading of 59.5.

Further Afield

• The current European recovery is showing itself stronger than previous ones. The euro area economy grew 2% q/q in Q2, considerably beyond the 1.5% consensus expectation, and this leaves euro area GDP a mere 3% below pre-pandemic levels.

• Eurozone CPI inflation increased to 2.2% in July from 1.9% in June. The uptick was attributable to base effects related to last year’s German sales tax cuts. With the European Central Bank (ECB) having signalled its willingness to look past temporary factors, inflation above its 2% target is unlikely to carry implications for the ECB’s monetary stance.

• Daily new COVID-19 cases are on the rise again in China. State media Xinhua News Agency reported that authorities have urged people to limit travel and avoid gatherings, and suspended some flights, trains, and long-distance bus services. We expect such firm and decisive actions to control the spread are likely to weigh on near-term economic growth prospects for China.

 

Notes from RBC Capital Markets & J.P. Morgan 

• TELUS – Solid Q2/21 results were slightly above our forecast across most financial and operational KPIs. Following modest upward estimate revisions and factoring in actual 3500 MHz auction spend, our $31 price target is unchanged. TELUS remains our best idea in Canadian telecom. We believe the key strategic benefit of the $1.5B of accelerated investment in 2021 and 2022 is an even stronger competitive positive.

• Apple – reported 10%/30% beat to consensus revenue/EPS estimates, respectively, one of the strongest we have evidenced in recent years, with the quarter comprising not only better than expected iPhone momentum, but also 30%+ growth in Services (when investor concerns into the print were centered around challenges in meeting consensus in the low-20s), and also a recent year high in relation to gross margins. Despite all the positives, including upside to iPhone volumes, which reinforces the higher upgrade/switching rates in the 5G cycle, as well as upside in Services, validating the benefits of a large installed base, the uncertainty around the supply chain situation and incremental challenges relative to iPhone supply are limiting optimism following the print.

• Microsoft – The stock traded flat the day after results. MSFT capped off a strong year with another solid quarter, coming above consensus across the board. More importantly, MSFT expects to sustain double-digit growth in FY22, while maintaining Azure growth in F1Q. We remain positive on MSFT's ability to capitalize on its multiple growth drivers and assumed coverage with an Outperform rating.

 

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Shiuman