Earnings, virus news to dictate direction of stock prices

US stocks rose slightly last week as a vaccine breakthrough boosted hopes that the world could return to normal.

The gains could moderate this week if earnings reports are as dire as anticipated and Covid-19 outbreaks in the US sun belt become deadlier.

Shares of Moderna surged after the biotech company, which has never succeeded in bringing a drug to market, said that its experimental, RNA-based vaccine showed impressive levels of efficacy in a mid-stage clinical trial.

This will allow the company to move sooner than expected into a late-stage trial of the vaccine, which will now be tested on people in "hot spots" nationwide.

Moderna said that the Covid-19-fighting antibodies produced in the blood of people inoculated with the vaccine were even more prevalent than in the blood of Covid-19 survivors.

Among the companies in the vaccine race against Moderna, Johnson & Johnson and AstraZeneca also gained, even after reports that the latter, a British company, may have had its work in Oxford University targeted by Russian espionage.

Hopes of a return to a pre-Covid-19 era of "normality" caused a surge in the prices of airlines, casinos, cruise lines, retailers and restaurants - the businesses that were shattered by the massive changes in human behaviour wrought by an uncontrollable pandemic.

Investors were betting that, with the security of a vaccine, consumers would become more comfortable in crowds.

In another illustration that markets were pricing in a vaccine, "stay-at-home" stocks such as Netflix, which reported a 10-million increase in subscribers in the second quarter, and Zoom Video Communications, fell sharply.

But the vaccine developers are not only racing one another. They are racing against the clock, as 60,000 more Americans every day face critical danger from the virus.

In Texas, Florida and other sun-belt states, many of those who were infected since June were younger people, exposed in parties and bars.

Those demographics, combined with the discovery of effective treatments such as Gilead Sciences' Remdesivir, spurred hopes that the plague-like death rates seen in New York, New Jersey and Northern Italy could be averted in the "second wave" state.

But 174 people were reported to have died in Texas last Friday alone. Hospitals in Dallas and Houston have begun resorting to storing bodies in cooling trucks when city morgues fill up.

"It isn't just about death; it's more about hospital capacity. That's really the breaking point," said Jim Paulsen, chief investment strategist at money manager The Leuthold Group. "You can't have people dying in the street while they are waiting in queue," he added.

While another spike in deaths would cause a market shock, he's not convinced that regional lockdowns, such as the closure of restaurants and other businesses in much of California, will have the recessionary effect of the nationwide lockdown earlier in the pandemic.

"Everyone is convinced lockdowns recently are going to cause the economy to crash again, but I'm not," said Mr Paulsen.

"Will it slow the pace of improvement? Absolutely. I would argue hot spots in the country take attention as compared to 'cold spots' 100-to-one."

But, he said, there may be enough major cities and states with Covid-19 under control to compensate for the loss of economic output should parts of Texas and Florida shut down as parts of California have.

That may partly explain the surprisingly muted damage to many corporate earnings from the pandemic.

Another explanation is the divergence of high finance from the "real economy".

Strong bank earnings last week were "driven by trading results, which is great for the bank and great for investors but doesn't put any of the millions of jobless Americans to work", said Mr Paulsen.

"That shows the widening gap between the Wall Street economy and Main street economy," said Oliver Pursche, an independent market strategist.

This week, major tech companies such as Microsoft and Tesla, both of whom have seen their shares surge since March, are re-awakening concerns about a new tech bubble.

While tech earnings are expected to hold up, lockdowns are expected to cause historic drops for industrial- and consumer-sector companies.

Overall second-quarter profits are expected to fall 43 per cent for the broad Standard & Poor's 500.

David Owen, a strategist with brokerage Jefferies, could as easily have been speaking of this earnings season when he described the likely uneven pace of the British economic recovery: "plenty here to confuse and wrong-foot markets".