Juan Carlos Ureta (Renta 4) | Stock markets have continued their phase of rest and profit taking despite the triumphalism and new stimulus plans from Biden in his speech to Congress in the first 100 days. Also despite the spectacular results published by the five big technology companies, which have beaten forecasts.
Tesla announced a 27-fold increase in profits over the same period in 2020, despite which the share price reacted with a 4% fall in the following session. Microsoft announced that its revenue was up 19% in the first quarter and its profit up 31% but the share price fell in after-hours trading by more than 3%. Alphabet/Google fared better, announcing revenues up 34% and profits up 106% as its shares rose 4.6%. Apple beat forecasts with a 54% rise in revenues and also approved an extensive $90 billion share buyback plan and rose after hours by as much as 4%, easing a little later. Facebook also beat estimates by a wide margin, increasing its revenue by 48% and doubling its profit, as did Amazon, which on Thursday announced that it had more than tripled its first-quarter profit. These are very spectacular figures, despite the small disappointments of Twitter and Spotify.
Then there was Biden’s speech to Congress on the occasion of his first 100 days in office. A triumphalist speech, in which he presented his unbridled public spending policy as a “turning point” in the US economy, taking the opportunity to add a new programme to the two already unveiled. So, in addition to the 1.9 trillion dollar programme approved in March, and the 2.2 trillion dollar programme for infrastructure already underway, Biden is now proposing a third programme for 1.8 trillion dollars to expand social benefits. This brings the Biden-era programmes to six trillion dollars in four months, almost thirty per cent of GDP. An impressive change in scale, much to the liking of current Treasury Secretary Janet Yellen. No wonder Wall Street has rewarded Biden with the second best stock market debut of a new president in history, second only to Kennedy in the 1960s.
Next, there is the Fed, which last Wednesday was busy ratifying its ultra-expansionary policies, lest anyone should be in any doubt. This means that the Fed, the ECB and the Bank of Japan will continue to inject the three hundred billion dollars a month they are currently injecting, even if the economy takes off.
Lastly, we have the data showing a very strong US economy, which looks set to replace China as the engine of global growth this year. On Thursday we learned that US GDP grew by 6.4% in the first quarter compared to the estimated 6.1%.
Notwithstanding, all this data has been received with a certain coolness by the stock market, as shown by the weekly evolution of the main indices mentioned above. So the question is, what’s going on?
There are two plausible explanations. The first is that the stock markets have been well ahead of the recovery. So the good data and growth are already discounted in the high valuations reached. The rise has been extraordinary, taking Apple’s capitalisation to over two trillion dollars and that of several large technology companies to over one trillion dollars. From this point of view, what we are seeing would be, as we said at the start, nothing more than a pause along the way, a temporary and even healthy correction.
Another, more worrying, explanation would be that investors are beginning to distrust stimulus measures as a sustainable solution or are even beginning to feel uncomfortable with the scale of Biden’s stimulus plans. It should not be forgotten, as we said earlier, that Biden’s successive plans now amount to 30% of US GDP, an enormous figure. Therefore it is logical that citizens are beginning to suspect there will be tax increases or other collateral effects.
