Analysts raising estimates at a record pace, again
While we have commented on the strength in US earnings estimate revisions activity recently, the latest readings warrant additional comment. Our data now show a new record (20-year+) high in the net proportion of analysts raising earnings estimates for US companies. The latest reading exceeds the recent then-record high seen at the start of this year, as shown in the chart below.
Commercial Real Estate finally on the rebound?
Among the biggest losers from COVID-19 and the resulting work-from-home trends that followed was the commercial real estate industry. Office buildings and retail stores that had been mostly full in 2019 were suddenly empty, and the companies that had been renting the space were often unable or unwilling to continue paying. And while stimulus support has helped much of the economy, the impact on commercial real estate has been more limited.
Rotation, not risk-off
In response to client questions, we update some indicators we discussed back in January to address the debate about whether recent market action is indicative of a defensive shift (potential equity market top) or a rotation within equities that maintains a “risk-on” environment. Our current view, as it was in January, is that risk appetite remains broadly intact and the weight of the evidence suggests that we are seeing a rotation, not a “risk-off” environment.
Used cars in the headlights
According to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics, “the index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase.”
Wow. That’s a big increase in used car prices, and a large influence for something that only makes up 2.7% of the overall CPI basket.
Cyclical sectors still dominating globally on earnings trends
As we discussed in our last commentary, analysts continue to raise earnings estimates broadly as companies keep beating consensus expectations. Expectations of additional fiscal spending and ongoing easy monetary policy along with progress toward re-opening of the economy are key macro drivers, while certain sectors such as Energy and Financials which had been areas of weakness in pre-COVID and immediate post-COVID times are now contributing more positively to the earnings outlook. This is true in the US and also globally.
Analysts still can’t keep up with surging earnings
Earnings reports for Q1 are coming in very hot once again, even after several consecutive quarters of beating consensus expectations. Analysts seem to still be struggling to keep up with the strength in US earnings, and continue to raise their earnings estimates.
To be fair, analysts have never had to deal with the level of volatility and uncertainty in the macroeconomy that has been seen in the last year or so. The shock of COVID-19 and associated shutdowns in economic activity, followed by unprecedented levels of fiscal and monetary stimulus, and the record-breaking speed of vaccine development are all extraordinary events that most analysts following individual companies are not traditionally prepared to incorporate into their earnings forecasts. The limitations on travel and uncertainty among company executives themselves are also likely hampering analysts in producing their earnings forecasts.
Tech fundamentals still favor Hardware over Software
While the Technology sector has been less dominant in terms of returns this year than it was last year, it remains the largest sector in the US market by value and the focus of much investor attention.
Our view within the Technology sector for some time now has been to favor hardware-related industries over software-related or services areas, and the latest update of both bottom-up and top-down indicators continues to support this view.
Labor market improving but still shows plenty of slack
In the longer-run, a key measure of inflation pressure is the amount of labor market slack (unemployed or underemployed people), which heavily influences the ability of workers to demand higher wages.
The standard reported unemployment rate data (i.e., the U-3 measure in the US) is useful in measuring labor market slack, but has limitations due (in part) to its definitions of “unemployed” and the “labor force” in the calculation: “unemployed” people as a percentage of the “labor force”. That is, to be counted as “unemployed”, a working-age person must be considered actively looking for a job (when asked if they have sought employment in the last four weeks in the monthly household surveys done by the Bureau of Labor Statistics, BLS). If they are not currently seeking employment for any reason, they are “not in the labor force” and thus do not count in the standard unemployment rate, even if they consider themselves unemployed.
Inflation is steady on the surface, volatile underneath
Inflation expectations have been a topic of growing interest thanks to the extraordinary fiscal and monetary support in place for much of the last year, most recently the huge $1.9 trillion American Rescue Plan that is currently sending checks out to millions of Americans.
All of this new spending by the federal government, along with the economic recovery permitted by the rollout of COVID-19 vaccines, is provoking more discussion about whether demand for goods and services will outpace the economy’s ability to produce them and push prices higher.
S&P 500 earnings have fully recovered, but with wide differences among sectors
The S&P 500 has reported another strong earnings season for Q4, with 79% of companies beating consensus earnings estimates for the quarter. This would be the third highest such reading in Factset’s data since 2008. The beat rate for top-line sales was similarly high at 77%. Aggregate income for the index is about 4% above year-ago levels, indicating that net income on a quarterly basis has fully recovered pre-COVID levels based on Factset’s data.