Earnings, inflation fears and Fed meeting make for busy week in markets

Concerns about higher taxes and inflation pushed the S&P 500 to its first weekly loss since mid-March last week, but Monday began where that week ended with stocks moving higher.

What's happening: While traders are largely looking past inflation worries, even after last week's IHS-Markit purchasing managers index showed yet another record high reading for prices, company executives are not.

• More S&P 500 companies (47) have cited the term “inflation” on their earnings calls for Q1 2021 through this point in time than during any quarter in more than 10 years, data from FactSet show.

On the other side: Earnings have been even better than expected so far, but reactions have been fairly muted. More than three-quarters of the S&P 500 companies that have reported results so far have beaten analysts’ estimates, according to data compiled by Bloomberg, yet the S&P gained just 0.2% while the Dow closed 0.2% lower.

• S&P 500 companies are on track to report a net profit margin of 11.6% for Q1, which would be the third-highest net profit margin reported by the index since FactSet began tracking this metric in 2008, trailing only Q3 2018 (12.0%) and Q2 2018 (11.7%).

What to watch: Investors also are awaiting earnings from Amazon, Facebook and Apple due later this week, though Tesla's stock fell after reporting stronger-than-expected numbers in its report after the bell on Monday.

• "We’re gearing up for a busy week on all fronts," Chris Larkin, managing director of trading and investing product at E-Trade Financial, told Bloomberg.
• "Big tech earnings, a look into Q1 GDP, and the Fed meeting could create catalysts for market moves. Though despite the strong earnings reports we’ve seen thus far, the market is really taking beats in stride amid already high valuations."

Asset managers continue to warn that stock valuations look worryingly high, but as I wrote yesterday, so far in 2021 the biggest risk to equity investors' returns has been selling.

• The S&P's forward 12-month price-to-earnings ratio currently sits at 22.3, well above its 5-year average (17.9) and its 10-year average (16.0), again approaching highs last seen during the dot-com bubble.

What's next: Today the Fed begins its two-day policy meeting and the market largely expects chair Jerome Powell to double down on his doublespeak that the economy is improving but still requires 0% interest rates and $120 billion a month of bond-buying assistance.

• However, investors will be watching for any sign that the central bank could start to reduce, or taper, the program sooner than expected.