As the global economy continues to find its footing amid growing concerns surrounding the delta variant and anticipation as to whether inflation is well and truly transitory or here to stay longer than expected, Q2 US earnings have continued to support upside in equity markets. Earnings showcases a company’s real profitability, indicating an investor’s confidence in future market prospects, and positive earnings particularly by established market leaders such as Apple and Amazon has led to continued investor optimism. With 91% of S&P 500 companies reported actual results, 87% of those companies have reported a positive Earnings Per Share as well as positive revenue growth. Although valuations of US equities remain stretched, with price-to-earnings trading above both 5-year and 10-year average, equities remain attractive relative to bonds, with the recent decline in real yields further widening the relative valuation gap.
Broadly speaking, with the majority of companies in the S&P 500 having reported actual earnings for the second quarter of 2021 and beating expectations, this will mark the highest percentage of S&P 500 reporting revenues above estimates since 2008. As highlighted by the chart below, at sector level, the top performing firms included Health Care (97%), Communication Services (96%) and Information Technology (95%). With the US economy continuing to release positive economic data, with the most recent industrial activity regaining momentum in July as total output reaching pre-covid levels, upside remains in US equities.
Source: Fact Set
Moving forward…
Expectations for corporate earnings over the next couple of years remains upbeat. Aggregate earnings of companies in the S&P 500 are expected to exceed 2019 levels of circa 30% this year, and to exceed pre pandemic levels by 55% by the end of 2023. Moreover, earnings from ‘tech-heavy’ sectors is somewhat more upbeat than the cyclical sectors in the near term, however over the longer term the financial sector is positioned to outperform tech-heavy sectors, with the aid from an increase in long-dated treasury yields and strong economic growth.
Corporate strength has not just been limited to the US, as EPS surprises have also beat historical averages in both Japan, Europe and the UK. Although equities have been volatile amid elevated headwinds as the delta variant continues to cause concerns, corporate profit recovery has provided strong fundamentals to support further upside in equities. Some choppiness is typical, as we transition to a mid-cycle environment, however, we remain overall positive on the equity outlook relative to bonds. As firms find their feet amid the post pandemic recovery, earning momentum will remain, as confidence in balance sheets transpires through a surge in share buybacks following a significant decline last year and firms returning cash to shareholders.
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