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'I wouldn’t rule it a bubble': Strategist explains why investors are paying high prices for stocks

By Medha Singh and Devik Jain

(Reuters) - Wall Street's main indexes rose on Monday with the Nasdaq at a fresh intraday record high as investors cheered signs of progress in COVID-19 vaccine development and an upbeat start to the second-quarter earnings season by Pepsi.

Shares of German biotech firm BioNTech <BNTX.O> jumped 10.9% and U.S. pharmaceutical giant Pfizer <PFE.N> climbed 4.3% as two of their experimental coronavirus vaccines received the U.S. FDA's "fast track" designation.

"There are renewed expectations that the Pfizer vaccine will be ready for approval by the end of October, which is sooner than expected - so that's very good news," said Thomas Hayes, managing member at Great Hill Capital LLC in New York.

Merger news also perked up investors as Analog Devices Inc <ADI.O> announced a $21 billion deal to buy rival Maxim Integrated Products Inc <MXIM.O>, sending its shares up 13.0%. Analog shares fell 2.7%.

The Philadelphia SE Semiconductor index <.SOX> rose 1.9%.

Pepsi Co <PEP.O> gained 1.5% as it benefited from a surge in at-home consumption of salty snacks such as Fritos and Cheetos during lockdowns.

"The market is sniffing out that the worst is behind us and is looking forward to earnings and guidance, which will more than likely beat very low expectations," Hayes said.

Not a bubble; investors are paying up for growth amid secular change

Still, investors are bracing for what could be the sharpest drop in quarterly earnings for S&P 500 firms since the financial crisis, according to IBES Refinitiv data. Results from big banks will be in focus this week.

The weak near-term earnings backdrop combined with rising stock prices have sent market valuations to extreme levels, leading prominent investors like Mike Novogratz to warn of a bubble.

Other leading Wall Street strategists don’t see it that way.

"I wouldn't necessarily call it a bubble," Invesco US Global Market Strategist BrianLevitt said to Yahoo Finance. "I think it's an environment where investors are willing to pay for growth really at most prices right now."

We need to have money in businesses that can take advantage of secular changes in society and secular changes of the economy,” Levitt added. “So no, I wouldn’t rule it a bubble. It’s an environment where customers are will to pay for growth where they can find it.”

The April-June reports will reveal the extent of the damage wreaked by coronavirus-induced lockdowns on corporate profits. With a record jump in cases in the United States and some other hotspots around the world, analysts have predicted a return to S&P 500 earnings growth only by 2021.

Recent economic data, however, has pointed to a revival in business activity, helping the Nasdaq clinch its sixth record close in seven weeks on Friday as broader markets rose on positive data from Gilead's potential COVID-19 treatment.

The S&P 500 is about 6% below its own record high hit in February.

At 10:13 a.m. ET, the Dow Jones Industrial Average <.DJI> was up 278.85 points, or 1.07%, at 26,354.15, the S&P 500 <.SPX> was up 28.32 points, or 0.89%, at 3,213.36, and the Nasdaq Composite <.IXIC> was up 134.46 points, or 1.27%, at 10,751.90.

Technology <.SPLRCT>, healthcare <.SPXHC> and consumer discretionary <.SPLRCD> rose the most among the 11 major S&P sectors.

Tesla Inc <TSLA.O> jumped 12% to $1,729.28, building on a rally of nearly 25% in the past two consecutive weeks. Over the weekend, it slashed the price for its Model Y SUV.

Advancing issues outnumbered decliners by a 1.55-to-1 ratio on the NYSE and a 1.18-to-1 ratio on the Nasdaq.

The S&P index recorded 34 new 52-week highs and no new low, while the Nasdaq recorded 96 new highs and nine new lows.


(Reporting by Medha Singh in Bengaluru; Editing by Saumyadeb Chakrabarty and Anil D'Silva)

NOTE: This article was lightly edited by Yahoo Finance to include expert quotes.

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