U.S. Equity Market Radar (May 5, 2014)

U.S. Equity Market Radar (May 5, 2014)

The S&P 500 Index rose this week on good earnings results, merger and acquisition (M&A) activity and better economic data. The market remains resilient with the S&P 500 less than one percent away from recent highs, and earnings reports have generally been well received.

S&P Economic Sectors
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Strengths

  • The telecommunication services sector was the best performer this week as AT&T rose by more than 3 percent and Verizon Communications rose by 2.5 percent. Sprint reported quarterly earnings that were well received by the market, AT&T announced it was in talks with DirecTV, and bond yields rallied, which tends to benefit dividend-paying stocks such as telecommunication companies.
  • The technology sector continued to advance this week with index heavyweights Apple, MasterCard and Facebook all rising at least 3 percent. Apple saw continued momentum from last weekā€™s earnings results, MasterCardā€™s earnings release was well received this week and Facebook hosted a developerā€™s conference with an emphasis on mobile ads that was also well received.
  • Electric utility Pepco Holdings Inc. was the best performer in the S&P 500, rising 23.5 percent this week on the heels of the take-over offer from Exelon Corp.

Weaknesses

  • The utility sector was the worst performer this week in spite of lower bond yields and M&A activity. The group has had a very strong run over the past few months and a pause would not be surprising.
  • Some industries exhibiting weakness this week include tires and rubber, gold and health care services.
  • Coach was the worst performer in the S&P 500, falling 12 percent. The company announced disappointing quarterly results as quarterly same-store sales in North America fell 21 percent. Overall, revenues fell 7.4 percent year-over-year.

Opportunities

  • The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery but not too strong as to force the Federal Reserve to aggressively change course in the near term.
  • The selloff in high-quality companies offers an opportunity to pick up companies with robust fundamentals at attractive prices.
  • Quarterly earnings reports continue to be well received by the market and companies are beating expectations.

Threats

  • A short-term market consolidation period after such strong performance cannot be ruled out.
  • Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is large.
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