Sightline Weekly Market Update: Earnings Continue to Surprise on the Upside
Major equities indexes ended the week modestly higher, with value and small caps leading large-cap. More robust than expected earnings growth and higher oil prices supported gains encouraging investor sentiment. News of accelerating vaccinations also added to investor optimism. The TSX gained 1.79%, the S&P 1.23%, the S&P 400 jumped 2.70% during the week, followed by the Russell 2000 gaining 2.55% by week’s end. It should be noted that the Russell 2000 index, which is comprised of the smallest of the Russell 3000 index, is up 15.68% year to date, outstripping all the major equity indexes. While value outpaced growth for the week, year-to-date, growth is dominating value in the US indices.
As mentioned, earnings continue to surprise on the upside, beating expectations. According to FactSet, 74% of all companies in the S&P 500 have reported results for Q4. Of those reporting companies, 80% have exceeded estimates by an average of 15.1%, which exceeds the average quarterly positive surprise of 6.3%. Since 2008 when FactSet started tracking the earning surprise statistic, the latest quarterly report is the third highest on record. Revenues also are up over expectations. Of the companies reporting, 78% beat estimates by an average of 3.3% above the five-year average of .9%. If the average for all reporting remains at 3.3%, it will be the highest reported revenues surprise on record since FactSet starting tracking in 2008.1
On Wednesday, the US Fed Chairman Powell spoke to the Economic Club of New York. In his remarks, Chairman Powell mentioned the slack in the labor market and the importance of an expansive fiscal policy as an “essential tool” for restoring the labor market. He went on to say the inflation fears brought on by too much stimulus, while possibly causing a sudden rise in inflation, would be a “temporary event that would not cause the Fed to raise rates or result in sustained inflation.” 2 To accommodate the possibility of a spike in inflation, Chairman Powell, in previous remarks, indicated the Fed would set a new policy of an average inflation rate of 2%, thus permitting inflation to run higher than the 2% for a period. The new policy will prevent the Fed from acting prematurely in the event inflation does spike on pent-up demand as the economy re-opens.
For the week ending Feb. 6, the Labor Department’s weekly initial jobless claims report fell to 793,000 from the previous week’s higher adjusted number of 812,000.3 The initial claims number is still persistently high in the face of tepid job creation and illustrates the difficulty facing leadership in returning the economy to full employment, as the accelerating transition from an analog economy to a digital economy reduces job opportunities.
The University of Michigan released its latest preliminary consumer surveys for February. The index of Consumer Sentiment fell to 76.2 from 79.0 in January. The Current Economic Conditions survey fell slightly to 86.2 from 86.7 in January, and the Index of Consumer Expectation fell to 69.8 from the January reporting of 74.0. The Sentiment and Expectations surveys are the most troubling. The Sentiment survey came entirely from the households with incomes below $75,000.4 Without government support to small businesses, who are the job creators in any economy, the wealth bifurcation will continue to persist, forcing the government to enact policies that will undermine economic growth and prosperity for the most significant number of their citizens.
As equity markets push higher, the threat of a correction at some point in 2021 looks possible. However, from a purely technical perspective, it is argued that we are at the beginning of a new bull market, driven in part by historic low-interest rates, expansive monetary policies, pent up demand created by economic lockdowns, over 1.6 trillion in savings, and a US saving rate of 13%.5 In Canada, the Q3 savings rate was 14.6%.6 We continue to believe equity strategies provide the best risk-adjusted returns for 2021.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.