Corporate earnings meet or beat expectations

Posted by Michael Aloian on May 5, 2021 1:05:06 PM
    

Most first-quarter corporate earnings reports have been meeting or beating expectations and this has raised the confidence that equity valuations are not excessive. The S&P 500 Index is trading at a reasonable 22x Price to Earnings multiple, but earnings estimates are being actively raised by analysts who see stronger revenue and profit growth in the second half of 2021. Financial, industrial, energy and basic materials companies are showing considerable revenue acceleration, expense control and order backlogs. Earnings from Apple, Alphabet, Amazon, Facebook, Microsoft and Qualcomm were all above expectation and guidance was strong for the year ahead. Both growth and value stocks are rising, but the pervasive microchip shortage is constraining production at some cyclical companies like Caterpillar and Ford. Small Cap and Mid Cap stocks continue to lead the market, while the service sector, especially travel and leisure, is gradually recovering.

The U.S. Federal Reserve remains resolute in its bond purchases and bond yields, which were rising in March but have now trended lower. With the 10-Year U.S. Treasury bonds yielding 1.63% after rising to as much as 1.75% earlier this year, bond investors may be overly complacent. In the past 12 months, energy prices are up 65%, the Commodities Research Bureau Raw Materials Spot Index is up 39%, and the U.S. Treasury has injected $5.9 trillion in stimulus money into the economy. Inflation is expected to rise for the next few months, although the Federal Reserve has indicated it believes this will be transitory and temporary. 

The rise of national political noise has enticed certain CEOs of large companies to jump into the public conversation about voting rights, gun control, wage increases, union membership and climate change. The political polarization in Washington has empowered corporate leaders to take stands that otherwise would not be in their core responsibility or best interest. This adds to the risk of alienating some groups of their clients while pandering to another set. The trend seems to indicate that every organization is compelled to demonstrate political correctness. Many corporations are focused on highlighting environmental, social and governance issues through echoing government-desired policies.  This certainly challenges corporate CEO and board management with greater complexities and risks.
 
With GDP growing at 6.4% in the first quarter, the Biden Administration is pushing for even larger government spending. The “American Jobs Plan” and the “American Families Plan” are multi-trillion infrastructure and social spending programs designed to enhance assertive government economic management. With GDP growth exceeding expectations already, the need for more wasteful government spending and raising taxes will be debated through the summer. The Washington, D.C., think tanks and political spin doctors are placing low odds at the passage of these plans as they are presently written. These plans will likely be smaller and more targeted if they are passed and the tax hike proposals on capital gains, as well as on individuals and corporations will also be less onerous than announced. We will be monitoring this carefully over the next few months because it will add volatility to financial markets.
 
Index        
Year-to-Date Return
S&P 500 Index      11.3%
S&P Mid Cap 400 Index  18.2%
S&P Small Cap Index            21.8%
MSCI All World Cap Index 
  9.6%
 
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Posted by Michael Aloian

Michael oversees the people and policies of the Trust and Investment Management Services Department and manages individual investment holdings. His clients include individuals, families, foundations, and institutions throughout the state of Florida.

Michael's education includes:
Bachelor of Arts in Economics, Harvard University, Cambridge, MA, 1982
Investment Portfolio Manager and Research Analyst since 1983
Graduate of the Florida Bankers Association Trust School, University of South Florida, Tampa, FL
Series 65 - Registered Investment Advisor
Series 52 - Municipal Securities Representative

Board member:
Florida Bankers Association, Florida Bankers Educational Foundation
Member, CFA (Chartered Financial Analyst) Institute

Michael serves on the Tampa Bay Committee on Foreign Relations and is a member of the CFA (Chartered Financial Analyst) Institute. He is immediate past-chairman of the Board of Directors for the Historic Bok Tower Gardens in Lake Wales, for which he now serves on the Investment Committee. He is a former president of both the Harvard Club of Central Florida and the Harvard Club of the West Coast of Florida. Michael is a 2005 Graduate of Leadership Tampa Bay.

Topics: Market Update, economy