19 Apr EARNINGS SEASON ACCELERATES THIS WEEK
Earnings season accelerates this week. Last week’s results were primarily concentrated in the mega sized financials. Profits exceeded expectations and perhaps of great significance is the strong quality of their loan portfolios as evidenced by the anemic provisions for loan losses.
As widely noted, the market is hovering near their richest valuations in two decades. In many regards a lot of the good news is already priced in and a strong case can be made the market will be looking for strong guidance for further advances.
Perhaps a group that will be closely scrutinized is mega size tech. According to Blomberg, analysts are projecting 27% profit growth for the group. What guidance will be given? As noted many times, this sector is under governmental attack on many fronts including taxes and anti-trust. In some regards the animosity towards big tech is the only topic where there is bipartisan agreement albeit for different reasons.
Many times, I have commented that six years of revenue growth was front loaded into 12 months but the shares have priced this exponential growth rate into infinity. In my view, growth has to exceed expectations to prevent volatility from rising.
Speaking of volatility, Bloomberg writes “sizeable algo sales have been conspicuously absent in April.” The newswire further reports “typically the largest sell programs of the month materialize between the 11th and the 20th.” Bloomberg stated last Wednesday’s Beige Book inspired algo sell off is the exception for the month however this sale was about 50% the size that typically occurs.
Many, including me, were expecting further rotation from growth to value to occur under quantitative and portfolio rebalancing. As widely noted it has stalled with nominal backtracking. The question about this rotation is perhaps the greatest current debate in the markets outside of inflationary expectations.
Will earnings, amplified by algo trading, be the catalyst for this rotation to continue? It is widely accepted value profit growth will exceed the growth rate of growth for the simplistic reason comparisons will be easy because of the COVID lockdown.
I reiterate my long-held view Main Street will outperform Wall Street, defined as value vs. growth. It is widely accepted growth in 2021 will be the greatest rate since 1984 for a myriad of reasons but this growth will come with a price…inflation.
Speaking of which, consumer sentiment improved in April following another round of fiscal stimulus and job growth acceleration. Consumers are expecting inflation to rise 3.7% over the next year, the highest since March 2012. Moreover, they expect prices over the next five years to increase 2.7%, compared to 2.5% last month.
While this far from inflationary expectation becoming unanchored, this is a large increase from the previous 10 years and expectations (and interest rates) are still at extremely low so any increase will be large on a percentage basis.
An issue at hand both mega sized growth issues and the bond market is trading at yesterday’s inflation rate and on the expectation this rate will soon return, which is essentially the view of the Federal Reserve. It is widely accepted that if these expectations fail to come to fruition, volatility may rise considerably.
What will happen this week?
The economic calendar is comprised of several housing and manufacturing statistics as well weekly jobless claims.
Last night the foreign markets were up. London was up 0.26%, Paris up 0.45% and Frankfurt down 0.02%. China was up1.49%, Japan up 0.01% and Hang Seng up 0.47%.
The Dow should open nominally lower. China’s economic data is suggesting a robust growth. The 10-year is unchanged at 1.58%.