US equities hit a stumbling block despite outstanding earnings results

Equity markets have had a mixed start in May. Despite stronger-than-expected first-quarter earnings, the upward momentum in US equities has seemingly stalled after a strong April.

While the Dow Jones Industrial Average was marginally up at 0.5 per cent, the tech-driven Nasdaq and S&P500 were trading lower in the early days of May. This is despite some stellar earning results last week.

Technology giant Apple, based in California, smashed quarterly revenues, coming in at $89.6 billion and up more than 54 per cent compared with last year. E-commerce giant Amazon also overshot revenue expectations, coming in at $108.5bn on the quarter.

Most of the recent upward moves in stock markets have been triggered by stronger-than-expected earnings across US equities and an improving economic picture.

Data from last week showed that the US economy grew 6.4 per cent in the first quarter of this year, following a weaker 4.3 per cent in the previous quarter. Consumer spending has been robust. Personal consumption, a key measure of output, ballooned to 10.7 per cent on an annualised basis.

While the picture looks promising in the US, worsening Covid-19 cases elsewhere have cast a shadow on global growth. Increasing cases in emerging markets such as India and Brazil, coupled with a slowdown in Chinese manufacturing, point to a drain in investor sentiment in the early days of this month.

Despite the slow start to the month, the S&P500 has risen 11.37 per cent from the start of the year and the Nasdaq is up 7 per cent year to date.

It remains to be seen how quickly markets rebound from the Covid-19 wave, but I would not be surprised if we are in for some more choppy trading sessions in the first half of this month.

With earnings continuing throughout the next two weeks, beating expectations will continue to drag equity markets higher. One particular earnings report I am watching closely is PayPal, which is expected to announce after market close tomorrow. I expect good things from one of the world’s largest digital money transfer platforms.

The rebound in US personal consumption has already benefited competitors such as Visa and Mastercard, which reported earnings that topped expectations in April.

I expect PayPal to show continued growth in its user base (377 million active accounts at the end of December) and the current use of the platform to support cryptocurrencies will further enhance its appeal. Earnings should beat estimates at $0.73 a share, which should position this stock for a proper run through to $275 by the end of the second quarter.

Currency and commodity markets also benefited during the month of April, with the US dollar selling off heavily as risk appetite returned to markets. EUR/USD on the Dubai Gold and Commodities Exchange broke through 1.20, retracing its entire sell-off in March, while GBP/USD also made a move towards the 1.40 level.

Gold also benefited from a weaker greenback, rallying as high as $1,790 levels. While we may be on the top end of the move, I expect some downside depending on how risk moods play out. A further deterioration of the new Covid-19 wave could boost the US dollar index, but I cannot see a move past 93.

Coming up on the economic calendar, we have the US non-farm payrolls jobs report on Friday. Expectations are for payroll jobs to have grown by 980,000 during April, with the overall unemployment rate ticking lower to an expected 5.8 per cent from the previous 6 per cent.

Finally, Ethereum broke through $3,000 this week, up more than 21 per cent in the first four trading days of May and 356 per cent year-to-date. The move takes the market cap of cryptocurrencies past $300 billion. To put this in perspective, this makes it larger than the likes of Exxon Mobil, Intel, Neflix and Pfizer.