Record Highs Every Three Days (And More Stock Superlatives)

“Stocks could soar to new heights in the week ahead,” someone at CNBC reckoned, as Wall Street looked forward to what could be a sixth consecutive weekly advance.

Whether US equities do or don’t continue to melt-up or otherwise extend their multi-week “YOLO feast,” 2021 will go down as one of the most remarkable years on record.

In his latest, Goldman’s David Kostin added to a long list of superlatives. The S&P “has made a new high on 30% of trading days YTD, trailing only 1995 as the highest annual rate on record,” he wrote, after noting that the index is now sitting at the bank’s year-end target with six weeks still to go.

As of Friday’s close, the S&P was around 7% higher than the most bullish year-end forecast on Wall Street.

Kostin thanked a “less hawkish” Fed meeting for the S&P’s gains on Wednesday, Thursday and Friday, with the latter marking the benchmark’s 64th new record high in 2021. One can only imagine what the tweets would be like if this were playing out under a second term for Donald Trump.

For what it’s worth, corporate profits grew 38% YoY in Q3 (with 89% of S&P market cap in). That’s a country mile ahead of the 27% growth consensus expected (figure below).

Obviously, profit growth decelerated from Q2’s anomalous surge (which came against the prior year’s pandemic-impaired comp). On average, firms have surprised by 9% and nearly two thirds beat by at least one standard deviation, according to Goldman.

Notably, margins held up despite myriad gale-force headwinds. At 12.3%, margins were 70bps higher than expected. You can thank robust demand. “More than 70% of the upside surprise to S&P 500 EPS this quarter can be attributed to margins,” Kostin went on to say, noting strength in Tech and Comms Services (what else?). Management, Goldman said, focused on “the degree to which strong demand allowed companies to pass through input cost inflation to customers.”

There were two key takeaways amid the compendium of statistics. First, the market is finally starting to put some weight on inherently “stale” information, despite lingering macro ambiguity. “For the first time since the pandemic, investors are finding forward-looking signals in backward-looking earnings reports,” Kostin remarked, noting that beats were actually rewarded this quarter with 66bps of outperformance the following day. That may suggest investors took some solace in management commentary about corporates’ capacity to mitigate margin pressure.

Still (and this is the second takeaway), extreme uncertainty is casting a pall over analyst estimates, which haven’t risen despite large beats. “The consensus bottom-up estimate for 2022 EPS has been revised just 1% higher during the past month and has remained near $221 since last quarter,” Kostin said.

Margin concerns and a still cloudy macro outlook notwithstanding, corporate America continued to deliver in the third quarter. At the risk of stating the obvious, much depends on consumers’ capacity to absorb price increases going forward.

This is a bit circular. Rising wages are one factor compelling corporates to raise prices, but their ability to do so depends on consumers making more money. From an economy-wide perspective, there’s a sense in which management is paying workers more so that they can afford to pay higher prices for the goods and services they produce.

Meanwhile, robust profits are one reason why American exceptionalism lingers as an investment theme (figure below, from BofA).

We’re currently witnessing the largest outperformance for US equities versus the rest of the world in nearly a quarter century, BofA’s Michael Hartnett wrote late last week.

Of the total $17.5 trillion gain in global equity market cap in 2021, the US accounts for more than $14 trillion, Hartnett said.