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US and European equities were set to end the week higher after a volatile few days, as fears about the Delta variant of coronavirus were soothed by strong corporate earnings and continued central bank support for financial markets.
The S&P 500 gained 0.8 per cent, putting Wall Street’s blue-chip share index on course for a record high even after it fell as much as 2 per cent on Monday. The technology-focused Nasdaq Composite rose 0.7 per cent.
The Stoxx Europe 600 index, which had its worst session of the year on Monday with a 2.3 per cent drop, gained 1.1 per cent and was up 1.5 per cent for the week.
The dominance of the highly transmissible Delta variant sparked fears about global economic growth slowing and isolation measures exacerbating the supply chain bottlenecks that have contributed to inflation surges.
Such concerns were swept aside, however, by expectations that central banks’ debt-buying programmes would continue to depress bond yields and make equities more attractive in comparison.
“It felt like a very miniature version of the spring of 2020,” said Trevor Greetham, head of multi-asset investments at Royal London, referring to a short-term plunge in global stock markets that was reversed after central banks pledged trillions of dollars worth of monetary support.
“The markets now know if there is a period of [economic] weakness, there will be extra stimulus as required.”
US president Joe Biden is expected to reappoint Jay Powell as chair of the Federal Reserve, suggesting no break with the Fed’s current policies, while the European Central Bank on Thursday reaffirmed its commitment to keeping interest rates at record lows.
Of the S&P 500-listed companies that have issued quarterly results so far, 88 per cent have beaten analysts’ forecasts, according to FactSet data.
Shares in Facebook roared almost 6 per cent higher on Friday after smaller social media platforms Twitter and Snap posted bumper revenue gains. American Express rose as much as 4 per cent after reporting better than expected quarterly profits.
Investors had already expected a blockbuster earnings season as companies’ profits were flattered by the base effects of a historic recession last year.
“But the earnings do matter,” said Philip Toews, president of asset manager Toews Corporation, because profit beats had become a justification for holding on to equities, which are valued at an elevated level based on several metrics compared to historical averages.
“When markets are as overvalued as they are now, anything that supports the rally is taken as significant,” he said. Investor behaviour during market peaks, he added, tended towards fear of missing out on further gains.
“We are in a bubble, we are in the top quintile of [historic] valuations, so its all about figuring out ways to remain committed to the market,” he said.
The cyclically adjusted price/earnings ratio of the S&P 500, a closely watched valuation measure developed by economist Robert Shiller, is at around its highest since the late stages of the 1990s dotcom boom, according to Barclays Indices.
The 10-year US Treasury yield rose 0.02 percentage points to 1.284 per cent but remained around a six-month low. Bond yields move inversely to prices.
The dollar index, which measures the greenback against major currencies, rose 0.2 per cent. Brent crude, the international oil benchmark, was steady at $73.78 barrel.