by Shawn Narancich, CFA
Executive Vice President,
Equity Research and Portfolio Management
Shifting the Narrative
A week that began with the sharpest pullback in equities since last fall concluded in remarkable fashion, as investor concerns about the economic repercussions of rising COVID-19 infections gave way to an increasingly constructive second quarter earnings season. The emotions of fear and greed commonly witnessed in financial markets are alive and well today as traders juxtapose the most recent pandemic statistics with evidence of yet another earnings season shaping up to exceed expectations. We see the proliferation of COVID-19 vaccinations as key to keeping the economy on track, and with effective protection being conferred against even the most recent variants, our bet is that widespread lockdowns will not be necessary this time around. Although credit spreads in the high-yield bond market have widened some of late, we agree with the equity market’s interpretation of recent events – that developed market economies like the U.S. will continue to rebound, providing a productive backdrop for corporate earnings.
Exceeding Expectations
At the beginning of this week, about 10% of the S&P 500 had reported second quarter earnings. Another 15% of the blue-chip index reported over the past five days, and the numbers overall are impressive -- over 80% of companies are beating both revenue and profit forecasts. Companies like Johnson & Johnson, AT&T®, and Coca-Cola are not only surpassing estimates but raising full-year guidance as well. The result? In just five short days, expectations for second quarter S&P 500 earnings growth have increased from 72% to nearly 80%, implying the best quarter of earnings growth since that which followed the Global Financial Crisis.
Numbers on the Rise
The increase in second quarter earnings estimates is following much the same path that investors witnessed last quarter, foretelling full-year 2021 earnings growth of over 40% for the S&P 500. Yes, corporate America has become very good at under promising and over delivering, but companies are also doing an admirable job managing rising costs with selective price increases and productivity gains, all of which feeds into a constructive earnings narrative that keeps getting better at the margin. As we are prone to observe, as earnings go, so go stock prices.
A Busy Week Ahead
This week’s earnings also provide some clues about consequential numbers still to come. Social media companies Twitter and Snapchat both reported better than expected online ad revenues this week, providing evidence that internet engagement remains strong even as more Americans venture out. Next week, all five of the FGAMA stocks (Facebook, Google, Amazon, Microsoft, and Apple) representing 20% of the S&P 500’s market capitalization will report earnings. For Facebook and Google, the revenue performance of Snapchat and Twitter are positive leading indicators, explaining in part why the former rallied in tandem with the latter today. In addition to the tech heavyweights, a slew of additional blue-chip companies will deliver earnings in what promises to be the heaviest week of second quarter reporting.
On the economic front, investors will hear from the Fed, which is set to proclaim its latest decision on monetary policy next Wednesday. Chair Powell and associates may shed some light on when the central bank plans to taper its program of quantitative easing. Regardless of when tapering happens, the Fed is likely to communicate its ongoing commitment to near-zero short-term interest rates in support of returning the economy to full employment.
Week in Review and Takeaways
Large cap stocks staged a strong rebound from Monday’s thrashing, recouping losses and proceeding to trade to new all-time highs
Earnings season rolls on, with encouraging results to date