Concerns about the Covid situation, a potential hike in US capital gains tax and overstretched valuations were some of the reasons for the bumpy performance last week on Wall Street. Still, the S&P 500 index managed to close near its record highs as corporate earnings and economic data reassured investors that equities remain the best option for growing wealth. Futures today are indicating a slightly positive start for the S&P 500 and Dow Jones Industrial Average, while the Nasdaq composite is lagging. 

In terms of last week’s economic data, the flash reading of the IHS Market US composite PMI rose to a record 62.2 in April from 59.7 in March and new home sales surged 20.7% last month to the highest level since 2006. The US economy is clearly firing on all cylinders with a Federal Reserve unwilling to withdraw support any time soon. That’s what we are likely to hear from Fed Chair Jerome Powell on Wednesday following a two-day FOMC policy meeting,

The US central bank is comfortable with the idea of inflation rising above 2% for some time until a wide-ranging recovery is achieved. So do not expect the Fed to scale back its bond-purchasing program or signal policy tightening in the near term despite the robust economic recovery. This will continue to be a positive factor for equities even though valuations may seem stretched.

On the earnings front, 84% of S&P 500 companies who have reported results for Q1 2021 have managed to beat analyst’s estimates despite the bar rising over the past several weeks. Earnings for tech giants Alphabet, Microsoft, Apple, Facebook and Amazon are all due this week. If the earnings surprises continue at such a magnitude, I wouldn’t be surprised to see another record high on the S&P 500, especially if US Treasury yields remain within this month’s trading range.

In currency markets, the dollar continues to underperform its major peers in what has been a poor start to the second quarter, after an exceptional performance at the beginning of the year. The dollar index is now flirting with the uptrend trajectory from January and a break below may signal further weakness from a technical perspective. Traders seem to believe that Europe and Asia will play catch up with the US and close the gap in terms of economic performance later this year.

The euro, Swiss franc and New Zealand dollar have all climbed more than 3% month-to-date against the greenback, and this week’s US GDP report and Federal Reserve meeting should provide traders some guidance. 

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