A lively debate ensues with day-traders chasing popular household names, pushing the stock market up, claim sceptics. Not so, argue the bulls, who point out that US technology is helping to refashion the world economy in response to Covid-19. Companies will be more efficient and able to cut costs, accelerating changes in working practices that may have taken a decade or more to implement.
The argument will run and run, and a correction in the autumn should not be a surprise: on momentum grounds alone, the market feels overstretched.
However, Jay Powell has shifted the goal posts and inflation expectations are rising. The more aggressive reflation stance from the Fed is not a surprise. It dovetails perfectly with the narrative of technology-led, low inflation growth. The Fed needs to be more aggressive. It needs to take risks to hit its inflation target. For the second week running, the stock market rally was driven by information technology. Cyclicals remain in the back-seat. Technology was a key component of the strong rise in durable goods orders reported last week for July.
The standout winner for last week was Salesforce. The big ‘earnings surprise’ led investors to ‘mark-up’ related companies last week. Indeed, the rise in IT valuations last week was broad-based.
Summary
• US technology in the driving seat
• Are day traders to ‘blame?’
• US economic recovery on track
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