How the Delta Variant Could Impact the Stock Market

(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).

While COVID is a concern, the latest earnings, economic, and employment data paint a better picture. Friday's jobs report was solid, with nonfarm payroll employment rising rose by 943,000 in July. This was above consensus estimates and the best figure since lockdowns were eased last summer.

The unemployment rate also fell by 0.5 percentage points to 5.4 percent, a new pandemic-era low. The Institute for Supply Management reported that service sector activity rose a record 64.1% in July, up from 60.1% in the previous month and beating the consensus forecast of 60.5%.

The service sector was led by hospitality and leisure activities. This was the largest beat in the history of the index

Earnings reports continue to beat as the blended EPS growth rate for the second quarter is 88.8%, compared to 63.0% at the end of the quarter. The term "blended" refers to the combination of actual and projected results that have not been reported.

In fact, more S&P 500 companies are beating earnings per share estimates for the second quarter than average, according to data from FactSet. The second quarter has been especially strong for the financial sector. This is good news for the economy as the sector is considered a bellwether of future financial growth.

It has also been a good quarter for lenders as they're writing more loans with the economy continuing to recover. Analysts at Goldman Sachs even boosted their S&P 500 targets for 2021 and 2022 due to corporate earnings growth surpassing expectations.

The bank increased its 2021 year-end S&P 500 target to 4,700 from 4,300. This represents a 6% gain for the index to the end of this year. Goldman also lifted its 2022 target to 4,900 from 4,600 due to low-interest rates.

This brings us to COVID, where cases are still surging. With a healthcare crisis in many states, investors should remain bullish. First of all, stock prices are forward-looking and based on projected corporate earnings. And from what we are seeing, companies are killing it in the earnings game.

Still, though, we need to be cognizant. The highly transmissible Delta variant makes up most of the new cases leading to a rise in hospitalizations. The vaccine helped limit Delta's impact, but there is the potential for a drag on economic growth if restrictions are reintroduced.

Whether or not local governments implement any changes, I do expect individuals to make changes. As I mentioned last week, medical professionals are recommending masks, even for the vaccinated.

Still, we could see people going further and avoiding leaving the house to protect their unvaccinated children. This could result in less money being spent and could slow the recovery in the job market.

However, I am more concerned about supply chain disruptions though. In countries where the vaccine isn't as available, it could limit factory work, which would worsen shortages and put more pressure on prices.

But the good news is that I don't expect a repeat of last year as vaccination rates are starting to rise again, and it's not politically feasible for a return to full lockdowns. In terms of the market, this could lead to a continuation of the volatility we have seen. So, we need to stay the course.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $442.78 per share on Tuesday afternoon, up $0.65 (+0.15%). Year-to-date, SPY has gained 19.21%, versus a % rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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