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Energy Sector Declines and Inflation Worries Weigh on Stocks as Earnings Season Begins

Weekly Update – July 16, 2021

  • The S&P 500 index fell 1% last week despite an upbeat start to the Q2 earnings reporting season, as worries about inflation and potential changes in monetary policy weighed on the sentiment of consumers and investors.
  • In its first weekly decline since the week ended June 18, the S&P 500 ended the week at 4,327.16, down from last Friday’s closing level of 4,369.55, which was a fresh closing high at the time. The index set an even higher closing record Monday at 4,384.63 but hasn’t closed above that since then.
  • Last week, which marked the unofficial kickoff to US companies’ Q2 reporting season, featured better-than-expected reports from companies including Goldman Sachs (GS) and JPMorgan Chase (JPM).
  • However, worries continue about inflation and how the Federal Reserve’s policy-setting committee may respond. Data released Friday showed the inflation concerns contributed to a decline in consumer sentiment in early July.
  • Concerns about COVID-19 cases again being on the rise also kept a lid on the stock market’s upward attempts last week.
  • The energy sector had the largest percentage drop of the week, tumbling 7.7%, followed by a 2.6% decline in consumer discretionary.
  • Only three of the S&P 500’s 11 sectors rose last week: The utilities sector climbed 2.6%, followed by a 1.2% rise in consumer staples and a 0.7% increase in real estate.
  • The energy sector’s drop came as crude oil and natural gas futures also fell. Weighing on the commodities, the Energy Information Administration reported gasoline stocks rose in what is usually the peak driving weekend of the year and on reports that Saudi Arabia and the United Arab Emirates reached an agreement on a dispute that led to the collapse of OPEC+ talks earlier last month and could increase supply to sate rising demand.
  • The energy sector’s decliners included Occidental Petroleum (OXY), down 14% on the week, and APA (APA), down 13%.
  • In consumer discretionary, shares of cruise operators fell amid the higher COVID-19 cases, which could delay the companies’ plans to resume normal cruising. Shares of Norwegian Cruise Line (NCLH) shed 16% while Carnival (CCL) shares were down 14% and Royal Caribbean Group (RCL) slipped 12%.
  • The utilities sector’s gainers included American Water Works (AWK), whose shares rose 3.7% on the week as Barclays raised its price target on the stock to $174 per share from $170. Barclays kept its investment rating on the shares at equal-weight.
  • In consumer staples, PepsiCo (PEP) shares climbed 4.2% as the beverage company reported better-than-expected Q2 results. In a note to clients, Morgan Stanley said the results confirmed that organic sales growth has “sustainably accelerated” and that there’s a short-term earnings per share upside compared with the company’s “conservative” 2021 guidance.
  • Next week’s companies reporting quarterly results will include International Business Machines (IBM) on Monday, Netflix (NFLX) on Tuesday, Johnson & Johnson (JNJ) and Coca-Cola (KO) on Wednesday, American Airlines (AAL) and AT&T (T) on Thursday, and American Express (AXP) and Kimberly-Clark (KMB) on Friday.
  • On the economic data calendar, housing data will be the focus earlier in the week, with the National Association of Home Builders home builders’ index for July due Monday and June building permits and housing starts due Tuesday. June existing home sales are also set to be released Thursday, as well as weekly jobless claims, followed by Markit’s manufacturing and services purchasing managers’ indexes for July on Friday.
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