Wall Street set for subdued start

After making progress yesterday, US indices – except the NASDAQ Composite, of course – are expected to give back some of those gains today. According to spread betting quotes, the Dow is expected to open 59 points lower at 27,681 and the S&P 500 6 points softer at 3,379. The tech-heavy NASDAQ is seen starting 202 points firmer at 11,467, driven by continued enthusiasm for the tech titans, for reasons explained by Stuart Rumble, an investment director at Fidelity International. “The five biggest tech giants with over $400 billion market cap (Apple, Amazon, Microsoft, Facebook and Alphabet) continue to lead this rally and dominate the S&P 500. Their combined market cap is around $7 trillion and as a group now represent 23 per cent of the index based on market capitalisation, the biggest share in modern times for the top five. The tech titans also have the richest average PE ratio, at 44 times earnings. This significantly skews the entire index’s PE [price/earnings] ratio,” said Rumble. “But dig a little deeper and a different picture starts to emerge. If we exclude the tech giants, the weighted average PE ratio of the remaining 495 index constituents is 22 times earnings. Still high, but much more reasonable. However, there is more to it than that. “The market is putting a significant premium on earnings growth. This is clear when we compare today’s estimates for 1-year earnings versus 2019 earnings. The weighted average growth in earnings 1 year from today is expected to be 41% higher than 2019 earnings for the top 5 largest companies, whereas it is essentially flat for the rest of the index. “So, the message from the market is that the top five companies can keep driving growth while the rest of the index companies lag. We think this implies ample room for a broadening of the rally, but it is difficult to see that happening without a better macro outlook leading to a more widespread improvement in earnings forecasts,” Rumble ruminated. Europe has had its purchasing managers indices (PMI) for August and the US will follow suit this afternoon. Economists, who are obliged to make predictions that do their reputations few favours, are expecting the manufacturing PMI to creep up to 52 and the services PMI to nudge up to 51. “On the earnings front we have the latest Q3 [third quarter] numbers from US agricultural equipment company Deere and Co,” writes Michael Hewson of CMC Markets. “Expectations are for profits to come in at $1.21c a share,” he added. Five things to watch for on Friday: Flash PMI data for the manufacturing and services sectors for August, both of which will be eyed for any indication on the trajectory of the US economy after jobless claims earlier this week rose back above 1 million Share price reaction from Pfizer Inc (NYSE:PFE) after the company said its coronavirus vaccine candidate, being jointly developed with German firm BioNTech SE (NASDAQ:BNTX), could reach regulatory review in October while also releasing data that showed the treatment displayed a “promising safety and immunogenicity profile” in its phase I US trial Second quarter numbers from shoe seller Foot Locker Inc (NYSE:FL), which in an update last week predicted an 18% rise in store sales in the period, better than expected. However, some analysts have voiced concerns that a reduction in US government stimulus could hit demand Existing home sales data for July following June’s figure of 4.72 million, bouncing back from a near decade low of 3.91 million in May, but below market forecasts of 4.78 million. Interest rates remain low which could boost sales further, however the escalating coronavirus pandemic in the US could squeeze the brakes Any further details from the US government on the possible re-imposition of international sanctions on Iran due to its nuclear ambitions, which has already drawn criticism from the UK, France and Germany