Open with Markets In Motion page
Welcome to RBC’s Markets in Motion podcast, recorded January 24th, 2022. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. This week in the podcast, we run through early takeaways from 4Q21 earnings reporting season, a few new thoughts on the Growth/Value rotation, and an update on investor sentiment.
Four big things you need to know:
- First, performance has been poor with 63% of S&P 500 companies falling significantly post results and companies missing on revenues getting hit hardest.
- Second, our transcript review suggests that labor is emerging as the new hottest topic, and that omicron disruption may have been greater than anticipated.
- Our valuation work suggests that progress has been made on the Growth rotation, but that it still has room to go.
- Retail investor sentiment is close to pandemic lows, a positive for stocks on a 12 month view.
If you’d like to hear more, here’s another 5 minutes. While you’re waiting a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major platforms. Now, the details.
Flip to slide 2
- Takeaway #1, it’s obviously been a bad start to reporting season in terms of performance.
- Most companies are still beating consensus estimates (77% for EPS, 80% for sales)…
Flip to slide 3
- …and the bottom-up sell-side consensus EPS forecast for the S&P 500 is still tracking at $224 (for 8% growth).
Flip to slide 4
- But 63% of S&P 500 companies have fallen 1% or more in the one day trading session post results.
Flip to slide 5
- Companies missing on revenues are getting hit hardest, down nearly 4% on average, while those missing on earnings are down less than 3%. Both of these stats are worse than last quarter.
Flip to slide 6
- One thing we’re keeping a close eye on is how 1Q21 and 2Q21 forecasts will evolve in terms of the anticipated growth rate. Right now, bottom-up consensus for S&P 500 EPS growth (bottom-up) is tracking at 6% for 1Q22 and 5% for 2Q22. That’s not a lot of room for error and the possibility of an earnings recession remains a risk worth monitoring.
Flip to slide 7
- Takeaway #2, our transcript review suggests that labor is emerging as the new hottest topic, and that omicron disruption may have been greater than anticipated.
- As has become our custom, we’ve read through most of the transcripts of the companies that have reported so far.
- Demand and the overall macro feels like less of a focal point compared to recent reporting seasons, which speaks volumes. But most of the commentary we’ve seen has still tilted positive with the Road & Rail names in particular highlighting a strong underlying demand environment, and Banks talking about healthy pipelines and consumers that are still flush with cash.
Flip to slide 8
- Short-term disruption from omicron has also been in focus within the demand discussion. On the negative side, several companies have noted that the disruption seen in December has continued into January and is expected to continue well into 1Q22. On the positive side, several Airlines emphasized that they expect a quick recovery.
Flip to slide 9
- The tone around margins – which has decoupled from actual margin trends in recent years -- has seemed more negative to us, with commodities, freight, mix, compensation, and marketing expenses all called out in addition to inflation, labor, and supply chain challenges.
Flip to slide 10
- We also feel like we’ve spent far more time reading about labor and compensation challenges than supply chains so far, suggesting to us that the former may replace the latter as the dominant topic of discussion in the weeks ahead.
Flip to slide 11
- Several companies have alluded to the idea of companies rebuilding inventories to get ahead of challenges.
Flip to slide 12
- The COVID/omicron discussion has been a bit more in focus than we’d expected, with several companies noting that the disruption to their workforce has been greater than anticipated or past waves.
- One Road and Rail company said: What we did not plan for was a vaccine mandate where we'd have to give people time off to get vaccinated and waves where we had hundreds of UP employees unavailable to us on any given day because of quarantine. And I look at that and I think shame on us. That's a risk factor that we did not adequately plan for.
Flip to slide 13
- Takeaway #3, our valuation work suggests that progress has been made on the Growth rotation, but that it still has room to go.
- Long-term earnings growth expectations for Growth companies relative to Value companies have come in sharply. This is important because the relative performance and P/E multiple between Growth and Value typically tracks this differential in log-term earnings growth expectations. The drop in the relative P/E for Growth has been commensurate with the drop in relative long-term growth expectations, but the latter is still well above past lows.
Flip to slide 14
- Another valuation indicator that’s looking a little more interesting for the Growth trade is the P/E of the most expensive stocks in the Russell 1000 relative to the cheapest stocks. The most expensive names have been heavily weighted to Tech and Secular Growth and tend to underperform the cheapest stocks when rates rise. That relative multiple has made a lot of progress to pre-pandemic levels, but still remains 14% above those levels.
Flip to slide 15
- Something else that keeps us concerned about further unwind in the Growth trade is that Nasdaq futures positioning among asset manager still looks elevated.
Flip to slide 16
- Wrapping up with takeaway #4, putting all of this into broader context, retail investor sentiment is close to pandemic lows, a positive for stocks on a 12 month view.
- Net bullishness on the AAII survey fell to -25.7% last week, close to pandemic lows (-29%).
- This was mostly about bulls (which are now at the low end of their historical range) being in retreat. Bears have moved up but are not at past peaks yet.
- On a four week average, this indicator is at -8%, close to our -10% contrarian buy threshold (below the -10% threshold, the S&P 500 has been up 15% on average over the next 12 months 86% of the time).
- In 2020, retail investor sentiment remained below the -10% four week average threshold for 12 weeks – but first got there in mid-March.
Flip to Industries in Motion page
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, with thoughts on specific sectors from RBC’s team of equity analysts.