Earnings season is well within its stride. So far, of the 287 companies that have reported so far 87% of these companies have beaten earnings estimates by a median of 15%. We’ll elaborate on which sectors stand out below.
The S&P 500 closed at 4,181.17 which was exactly one point higher than it closed last week. It is the third week in a row that the market is essentially flat. However, the leadership of defensive names seemed to be broken. Despite some weakness on Friday, the 5D gains were led by Energy and Financials. There has been a lot of strong earnings across diverse sectors. Many Epicenter names like Cleveland Cliffs (CLF -2.30% ) and Harley-Davidson (HOG 0.08% ) have shown how Epicenter stocks can surprise dramatically to the upside. You may have noticed that despite record earnings at the best of the FAANGs, prices didn’t move all that much.
However, on Friday Energy led the losses losing 2.53% on the day. Despite eight sectors being negative, the volume wasn’t very strong. Even though the market shrugged off the earnings of the oil majors, we saw a lot of strength there. Exxon Mobil had its first profitable quarter after four in the red. Chevron also noted that it could maintain 10% FCF growth at $50 Brent.
What would happen to Energy companies at $80 brent? Commodities appear to be booming across the board. The Chicago PMI reading this morning had its highest reading since 1983. In another sign of the coming boom, there is a shortage of hospitality workers as restaurants and hotels try to hire all at once. Southwest and American airlines are bringing back flight attendants and pilots. Consumer bookings, and consumer spending is rising handsomely. Amazon recorded its greatest quarter, sales-wise, ever, hitting a record of $108.5 bn. Apple’s results were called “borderline unbelievable” by Morgan Stanley. Credit Suisse hiked its price target on the S&P 500 to 4,600 because the broader earnings season boasts the ‘strongest revisions and surprises ever.” They boosted their 2021 EPS to $200 from $185 for the index.
Of course, there were negative surprises too. Ford reported a pretty shocking interruption in production as a result of the chip shortage. It will be interesting next week to see how this issue has affected other US automakers. Ford will produce 1.1 million less cars in 2021 than it initially planned to. US GDP surged to 6.4% growth on a sequential basis, slightly lower than anticipated. You may have noticed that despite record earnings at the best of the FAANGs, prices didn’t move all that much.
Despite the tiredness in some mega-cap names, we think that earnings season so far is showing that the narrative behind the Epicenter trade is definitely coming to fruition. The other thing is that from the looks of many of the best performing Epicenter names this earnings season, the gains and outperformance has legs and will likely keep coming. This is after all, very much in line with what we predicted. Tech stocks, even if they do everything perfect, may have a lot of the good news already baked in. The names that are considered boring by institutional investors sure do grab attention when they show triple digit gains in operating leverage and significant and seemingly sustainable earnings growth.
It is hard for Wall Street right now because it largely relies on historical data and careful quantitative analysis of endogenously dominated economic cycles which are relatively more predictable than the wild times we live in. Thus, we see a lot of opportunity in the Epicenter stocks that are doing amazing things this earnings seasons and will likely continue to.
The recovery will be uneven, and some things may never be the same. While we certainly have great statistics like the fact that personal income soared a record 21.1% in March as a result of government stimulus, we also must remember that millions of medium and small sized businesses are forever wiped out. There are some indications that elements of the ‘work from home’ reality may stay past the pandemic.
According to a University of Chicago Beckder Friedman Institute study that sampled 30,000 Americans, 20% of full workdays are now predicted to be supplied at home. This is a four-fold increase from the pre-pandemic period This means more dollars will be spent in the suburbs and less dollars in urbans centers than before the pandemic. So, it may not be as simple as saying everybody wins, and we certainly don’t think every Epicenter name will. However, as we have been showing strong and dedicated management teams are creating impressive turnaround on behalf of shareholders that would have been unimaginable in different times.
We think the best risk/reward tradeoff is in Epicenter. We’re excited to report on the rest of this incredibly strong earnings season and the re-opening likely to follow it!
