Daily Brief: This Earnings Season, Root For The Underdogs

Daily Brief: This Earnings Season, Root For The Underdogs

almost 3 years ago3 mins

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Analysts are expecting US earnings to have grown by the most in a decade last quarter, as American companies leave 2020 in the rear-view and finally get back to the future.

What does this mean?

It’s that time of year when investors find out how companies have been performing, and they’re expecting big things: analysts have raised their estimates for US firms’ earnings growth by 6% over the last three months. That record increase – more surprising considering analysts usually lower their expectations – could be because they slashed their earnings forecasts by too much at the height of the pandemic, or just because they’ve seen upward-trending economic growth expectations and adjusted accordingly.

SP 500 change in earnings estimate

Either way, US companies are forecast to have grown their earnings by 25% on average last quarter – way above the 4% average of the past five years. Throw in the fact that most companies tend to underpromise and overdeliver anyway, and earnings growth will probably reach at least 28% – the highest in more than 10 years.

SP 500 earnings growth

Why should I care?

Zooming in: All bets, please.

Investors reckon companies in the consumer discretionary sector – i.e. sellers of nice-to-haves, like carmakers and luxury goods companies – will post the biggest boost to earnings. Shoppers, after all, have needed something to spend their money on. Financial companies are projected to come in a close second, while energy companies and industrials – especially airlines – are expected to see their earnings drop.

For markets: Look for the underdogs.

Investors’ main aim during earnings season is to back companies that’ll beat expectations, but between sky-high share prices and ever-climbing growth forecasts, that’s easier said than done. Still, consumer staples and utilities firms seem like a good place to start: not only are they the worst-performing US sectors this year, but analysts haven’t adjusted their expectations of them lately – making them the most likely to do something genuinely surprising.

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The Inflation Rate Hit An Eight-Year High Last Month

Fed image

Fresh data on Tuesday showed that prices of US goods and services rose at their fastest in eight years last month – and now investors are nervous the US central bank will pull the plug on economic support altogether.

What does this mean?

The US government stepped up its aid for American taxpayers last month, bringing the nation’s bank accounts back from the brink with some much-needed stimulus checks. So with more spare cash floating around, it’s no massive surprise that inflation’s on the rise: prices ticked up by a higher-than-expected 0.6% in March from the month before, and 2.6% from a year earlier – exceeding the Federal Reserve’s (the Fed’s) target. Plenty of economists are expecting that figure to hit the 4% mark before long, and if it transforms from one-off spike to spiraling trend, there could be big problems ahead…

US CPI with ING forecasts YoY

Why should I care?

For markets: Fed support isn’t going anywhere.

The Fed’s been propping up the prices of stocks and bonds for more than a decade. So the last thing the central bank wants is a repeat of the “taper tantrum” of 2013, when the slightest hint it’d be reducing its support sent waves of panic through markets. That’s also why it’s now insisting it won’t touch interest rates – the brakes of the economy – until US inflation averages 2% over a sustained period of time, not just a month or two. Those assurances don’t seem to have worked, mind you: the possibility of a taper tantrum topped a Bank of America poll of investors’ biggest worries on Tuesday.

BofA poll

The bigger picture: … until it does.

One Fed official did show his hand this week, saying that three-quarters of Americans would need to be vaccinated before the central bank would even think about withdrawing economic support. If nothing else, then, this week’s hold-up of the Johnson & Johnson vaccine could buy inflation-anxious investors a bit more time to safeguard their portfolios.

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