Delta Variant Shouldn't Hurt U.S. Stocks, Strategists Say

The resurging COVID-19 infection rate should not derail the continued U.S. stock market rally, according to a number of stock strategists.

"Investors are concerned about the impact on economic growth from the Delta variant, but the new strain should not pose a major market risk," write Goldman Sachs equity strategists led by David Kostin in their latest weekly market note. "Vaccinations, equity demand from households and corporations, and attractive relative valuations will support equity inflows and prices."

Hospitalization and death rates are also relatively contained, despite the surge of infections, and U.S. earnings growth remains robust, writes Solita Marcelli, chief investment officer for Americas at UBS Global Wealth Management in a recent note.

"We view the recent weakness as a buying opportunity as these sectors are still expected to see outsized earnings growth and valuation metrics remain attractive," writes Marcelli, referring to cyclical sectors such as consumer discretionary, energy, financials and industrials.

Kostin and his colleagues recommend tactical purchases of airlines and hotels as well as energy — "virus-exposed pockets of the market" that "remain underwater" due to fears that the latest pandemic wave will weigh on economic growth. Longer term, Goldman strategists are recommending "high quality secular growth stocks" because the "high pricing power" of those stocks should prevail as GDP growth decelerates.

A Strong Earnings Season

Nicholas Colas, co-founder of DataTrek Research, says strong earnings reports, running well ahead of Wall Street expectations, are another reason for stocks to trade higher and why U.S. large cap stocks especially have "so resoundingly shrugged off global pandemic concerns."

With almost a quarter of S&P 500 companies reporting second-quarter earnings to date, revenues are coming in four percentage points ahead of Wall Street expectations, yielding earnings that are 19% ahead of expectations, explains Colas.

Eighty-six percent of companies are beating revenue expectations and 88% are beating earnings estimates — more than any year since 2008, writes Colas. "How much more quickly earnings grow relative to revenues — is the key issue to consider."

For the third quarter, Wall Street analysts are expecting 13% sales growth and 26% earnings growth versus the year-ago third quarter, implying a 2:1 earnings leverage ratio. In the second quarter, the ratio is running at 5:1, which bodes well for the future, according to Colas.

He's forecasting S&P 500 earnings per share will average about $55 over the next four quarters, or about $220 per share. The S&P 500 is currently trading at a forward multiple of $225 per share, which is 38% higher than 2019 pre-pandemic S&P 500 earnings of $163 per share. But the index itself is trading only 31% above its February 2020 pre-pandemic highs, leaving more room to advance, according to Colas. FactSet earnings estimates are currently near $214 after moving higher.

Waiting for the Fed and Q2 GDP

In addition to earnings reports, stock markets this week will be watching to see what the Federal Reserve policymakers, including Chairman Jerome Powell, say this week about the economy and monetary policy, and what the Commerce Department reports for second-quarter GDP growth.

The Federal Open Market Committee, which meets Tuesday and Wednesday, will not be releasing new economic projections. The Bureau of Economic Analysis, a division of the Commerce Department, releases the second-quarter GDP report on Thursday. Bank of America Securities economists led by Michelle Meyer expect second quarter GDP growth to accelerate to 8.5%, up from 6.4% in the first quarter.