You know, it’s funny: Q1 2021 was just about as good as it gets on the earnings front for corporate America and yet, reporting season had a kind of “If a tree falls in the forest…” feel to it.
This is admittedly anecdotal, but I haven’t seen anything that approximates a deluge when it comes to media coverage of the blowout profit growth posted by S&P 500 companies during Q1. Sure, the comp was affected by the pandemic but, as documented here last week, the pace of beats was historic, and actual profit growth was double (and then some) the blockbuster quarter consensus already expected.
Markets were as disinterested as the media. Companies beating estimates on the bottom line were rewarded at just half the normal “rate.”
Apparently, it’s not just my imagination. In a piece published Sunday, Bloomberg called the ongoing improvement in corporate earnings “almost invisible,” even as the same article credited the same profit growth with “putting a floor” under markets amid “growing inflation anxiety and spotty data.”
The almost across-the-board beats (figure below) have forced strategists to lift profit forecasts. Consensus now sees 2021 earnings of $184 for the S&P, up $10 from the beginning of reporting season.
The juxtaposition with inflation fears and tax concerns is amusing, to say the least. Higher input prices, rising wage costs and a higher corporate tax rate are all textbook margin headwinds and yet, management seems relatively sanguine about the situation. So do analysts.
“Our top-down index and sector earnings forecasts are driven by strong sales growth and expanding net profit margins,” Goldman’s David Kostin said late last week. The bank cited a “strong sales outlook coupled with elevated operating leverage and cost management” in projecting “a new record” for margins this year.
Meanwhile, for all the hand-wringing over inflation and the potential for rising bond yields to derail equities (especially “hyper-growth” names), folks keep buying stocks.
Inflows into global equity funds are annualizing a truly astounding $1.3 trillion. Nearly a half-trillion poured into stocks through mid-May (figure below).
“Critically, with regard to equities being able to withstand the sentiment panic around inflation and concurrent systematic and mechanical deleveraging flows, [we’ve seen] more of the same EPFR fund flow data, with one-week global equities inflow at +$25.7 billion,” which ranks 98%ile, Nomura’s Charlie McElligott wrote Monday.
Under the hood, you can find some nuance (the inflow into Value shares last week ranked in the 99th%ile, while Growth funds suffered a fifth straight outflow, for example), but the overarching story is just that investors have poured money into equity funds uninterrupted.
When you combine “stellar” (as Goldman put it) earnings with incessant buying, it’s not terribly difficult to explain equities’ grind higher. Occam’s razor.
“Slowly but forcefully, Wall Street has come to terms with corporate America’s resilience,” Bloomberg wrote, in the same above-linked piece, noting that “a profit recovery that was expected to take years is on track to be done by June.”