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Strong Economy, Low Yields and Bank Earnings Send Wall Street to New Highs, but What's Next?

- By Panos Mourdoukoutas

News of an improving economy, low bond yields and better bank earnings sent major U.S. equity indexes to new highs last week. The S&P 500 closed at 4,185.47 on Friday, up 1.37% for the week, while the Dow Jones closed at 34,200.67, up 1.41%. The Nasdaq composite closed at 14,052.34, up 1.44% for the week as tech stocks sustained their momentum.

Wall Street began the trading week on shaky ground, following the release of a government report on Tuesday that showed inflation is on the rise. The March Consumer Price Index - a measure of the cost of living for urban consumers - rose 0.6%, the highest reading since August 2018.

Rising inflation is usually a headwind for Wall Street as it pushes Treasury bond yields higher, making equities less appealing to investors.

But it didn't happen this time around. Bond yields remained steady. Traders and investors seem to be focusing on geopolitical concerns, which increased the appeal of U.S. Treasuries.

Then came the release of two reports on Thursday, which showed that the U.S. economic recovery is gaining momentum.

March retail sales rose 9.8% from February and 27.7% from a year earlier, the most significant increase since May 2020.

Initial unemployment insurance claims dropped to 576,000 for the week of April 10, from 769,000 in the previous week, meaning that more Americans got back to work.

Both reports added fuel to equities as a more robust economy translates into higher consumer spending and higher revenues and profits for U.S. companies.

On the negative side, a more robust economy adds fuel to inflation, igniting fears of rising Treasury bond yields. But it didn't happen this time around either. Bond yields edged lower toward the end of the week as debt defaults in China and anxiety over the U.S.-Russian tensions boosted demand for safe-haven assets.

Meanwhile, strong bank earnings added to the bullish investor and trader sentiment.

In short, Wall Street lived in the best of both worlds last week with an improving economy, falling long-term interest rates and better profits.

But how will things look next week for Wall Street? It all depends on earnings, as the macroeconomic calendar is very light. More than 400 companies from all sorts of industries are reporting, including IBM (NYSE:IBM), American Express (NYSE:AXP), Coca-Cola (NYSE:KO), Netflix (NASDAQ:NFLX) and AT&T (NYSE:T).

While it's unclear whether the majority of these companies will meet, beat or miss analyst expectations, one thing is clear: with major averages being at an all-time high, profit reports will get increasing scrutiny by value investors.

Disclosure: No positions.

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This article first appeared on GuruFocus.