Welcome to RBC’s Markets in Motion, recorded July 12th, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
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This week in the podcast, we run through our thoughts on 2Q21 reporting season, which gets underway this week with the Financials, gets busy next week as sector representation broadens out, and gets crazy busy the last week of July when will over a third of S&P 500 companies will report.
Three big things you need to know: (1) 2Q21 reporting season is off to a good start, based on the stats of the early reporters. (2) An important shift in earnings sentiment has occurred, with Cyclicals, Value, and Financials weakening. (3) Our recent analyst and investor surveys suggest inflation impacts will be the key issue to monitor.
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Now, let’s jump into a few more details.
- Point #1, 2Q reporting season is actually off to a good start based on what we’ve seen from the early reporters.
- The percent of companies beating consensus on both EPS and sales is tracking very high, similar to what we’ve seen for most of the past year.
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- And the stock price reactions speak for themselves. 56% of the early reporters in the S&P 500 have seen their stock prices move up 1% or more in the one-day trading session immediately after their prints.
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- Outlook commentary has generally been positive based on our transcript review. So far, 13 of the 18 S&P 500 companies we have transcripts for have noted continued strong demand, although several have also commented on a deceleration in the pace of growth – this will be something to keep an eye out for in the weeks ahead.
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- On margins, 10 companies have mentioned expansion while 6 have referred to flat/contracting margins. Pricing power and labor pressures have been hot topics as expected, though on the latter it’s worth noting that a have also commented that labor pressures are abating or may soon.
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- Point #2, an important shift in earnings sentiment has occurred as we head into reporting season.
- The Cyclical/Value trade is entering 2Q21 reporting season a bit wounded – that’s not a statement on recent performance trends. Rather, the percent of sell-side EPS estimate revisions to the upside is no longer stronger in Value than Growth, for the first time since January.
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- Similarly, Cyclical sectors are no longer tracking ahead of Secular Growth sectors on the rate of upward revisions, reversing a trend favoring Cyclicals for most of the year.
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- This is really because at the sector level, Financials have faded on upward revisions within both the S&P 500 and the Russell 2000. It remains one of the strongest sectors on upward revisions for the past 13 weeks, but has become one of the weakest over the past 4 weeks.
- This is another pillar of support for the Cyclical/Value trade that has dissipated recently. It suggests to us that the recent performance woes of Value and Cyclicals aren’t just all about the macro. There’s an earnings component as well. For the Value trade to get going again, we probably need to see earnings shift back in Value’s favor.
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- Point #3, inflation impacts will likely be the key to how this reporting season is judged.
- In our late-June investor survey, 53% said that inflation pressures aren’t baked into consensus estimates/company guidance at all or only a little.
- RBC US equity analysts weren’t quite as pessimistic in our mid-June analyst survey, but 49% still said this wasn’t clear or they didn’t know.
- We don’t have a great feel for how this will shake out from the early reporters yet, but think this issue will be one of the keys to determining price action in the broader market in the weeks ahead. If things aren’t as bad as the buy-side fears, that could actually be good for the market.
That’s all for now. Thanks for listening, and be sure to reach out to your RBC representative with any questions.