Dow Jones Ekes Out Record Close as Earnings Boost Optimism. Will the Rally Continue?


US STOCKS TALKING POINTS:

  • Dow Jones ekes out small gain and manages to close at an all-time high
  • Positive corporate earnings continue to be the main bullish catalyst
  • The fundamental backdrop is becoming more positive, while the technical picture remains bullish over the medium term

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U.S. stocks have staged a strong rally in recent weeks, buoyed by solid earnings despite concerns about the economic slowdown and mounting price pressures. Although the reporting period has just begun, quarterly results have mostly exceeded expectations, with 81% of S&P 500 members that have already released financial statements beating forecasts. This robust performance is a sign that corporate America has been able to effectively navigate supply chain snags for the most part and that inflation hasn’t taken a big bite out of profit margins just yet.

Against the improving backdrop, major equity indices such as the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100 have all set fresh record highs this week on a closing or intraday basis – a development that begs the question: will the rally continue in the near-term?

From a fundamental point of view, there are headwinds that could weigh on the market, but the worst may be over. For example, Covid-19 anxiety is clearly waning as new cases and hospitalizations decline, while consumer confidence appears to be on the mend amid improved optimism about the employment and income outlook, following three straight months of decline. With coronavirus worries easing, household spending on services may rebound in upcoming months, accelerating the recovery in the labor market, and boosting sentiment across the board, a scenario that can create a constructive backdrop for U.S. stocks.

Aside from positive seasonality, fiscal stimulus may spur the next leg higher in equities. The $550 billion infrastructure bill already green-lighted by the Senate could be approved by the House in coming days if Democrats in Congress secure on agreement on reconciliation. A deal on Biden’s broader “Build Back Better” agenda could unlock between $1.5 trillion and $2.0 trillion in new government spending over a decade. Although the details are being finalized and are still vague, a large spending package without raising corporate taxes could be bullish for future earnings and thus seen as a bullish catalyst for stocks.

DOW JONES INDUSTRIAL AVERAGE TECHNICAL ANALYSIS

The Dow Jones marked a record close on Tuesday, ending the day at 35,756 after eking out a daily gain of 0.04%. As of now, the blue-chip index maintains a bullish outlook after validating a double-bottom formation and printing new higher highs on the daily chart, but positive sentiment could fade as price approaches channel resistance and the market becomes overbought. That said, if we see a pullback from current levels, the first support to consider appears at 35,500, followed by 35,500. Conversely, if buying pressure picks up pace and the Dow clearskey resistance at 35,900, there could be room for a move towards 36,300, the upside target given by the double-top technical pattern.

DOW JONES DAILY CHART

Dow Jones Ekes Out Record Close as Earnings Boost Optimism. Will the Rally Continue?

Source: TradingView

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—Written by Diego Colman, Contributor