Welcome to RBC’s Markets in Motion podcast, recorded October 18th, 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.
This week in the podcast, we revisit our work on investor and earnings sentiment, which we’ve been watching closely post Labor Day, offer a few thoughts on earnings season which officially got underway last week, and offer some new thoughts on supply chains. Four big things you need to know:
- First, individual investor sentiment may be starting to recover, after turning deeply bearish last month.
- Second, earnings sentiment has continued to deteriorate for the S&P 500, but may soon bottom in Industrials and Materials, supporting the idea that much of the pain from supply chain pressures may already be baked into those sectors.
- Third, 3Q21 reporting season is off to a good enough start in terms of the stats, and the commentary from companies has also continued to emphasize strong underlying demand.
- Fourth, we see other glimmers of hope – in data – on supply chains beyond the recent decline in freight costs that has captured investor’s attention.
If you’ve got five minutes, let’s jump into some of the details. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify and other third party platform. Now, the details.
Takeaway #1: Individual investor sentiment may be starting to recover, after turning deeply bearish last month.
- In August and September bears rose sharply while bulls retreated in the weekly AAII survey. And in mid-September, the gap between the bulls and bears fell well below the -10% threshold (in favor of the bears) that has tended to be a good contrarian buy signal for the S&P 500 in the past.
- Last week, things changed for the better as the bears pulled back and bulls picked up. The bulls now slightly outnumber the bears again on a weekly basis, and the four week gap between the two has improved to just -6.7% in favor of the bears.
Takeaway #2: Earnings sentiment – the rate of upward revisions - has continued to deteriorate for the S&P 500, falling from 78% in August to 59% in October, but Materials and Industrials – the only two sectors in negative revision territory – have already gotten close to levels that tend to mark bottoms when a recession or major crisis hasn’t been on the horizon.
- Industrials revisions were tracking at about 29% to the upside as of last week, and non-crisis lows tend to be in the high teens. The stats on Materials are similar.
- This lends support to the idea – expressed to us by a number of investors we’ve spoken with this past week – that supply chain pressures are already well understood by markets and may already be largely baked in.
- Interestingly, Industrials is the only sector that has seen negative revisions for both EPS and revenues over the past four weeks, something else that tells us the bar has already been lowered significantly for the sector as it’s reporting season ramps up this week.
Takeaway #3: 3Q21 earnings season has gotten off to a “good enough” start to calm investor fears.
- In terms of the stats - the percent of companies beating expectations on both EPS and revenues has admittedly been tracking a little below last quarter’s levels, but remain extremely strong relatively to history – at 79% for EPS and 82% for sales.
- Interestingly, as beats have become a little less plentiful, they’ve also been rewarded more in terms of seeing stronger stock price reactions.
- In terms of company commentary, guidance trends and margin commentary have been mixed. In addition to supply chains, inflation, and labor, energy and raw material costs and availability have been highlighted.
- But most companies have also highlighted continued strength in underlying demand. Some have highlighted improving trends in September vs August. A few big banks highlighted the strength in consumer balance sheets. On supply chains, one logistics company that reported last week provided some important context when they observed that companies are “gaining control of their supply chain” – suggesting many are still finding a way to manage through.
Wrapping up with takeaway #4 on supply chains - there are some glimmers of hope in some of the data we’ve been watching besides freight costs and global COVID cases.
- To be sure – these are all early innings and in the “less bad” category. But as COVID reminded us over the summer, that’s how positive trends often get started.
- Specifically, we point out that in most regional Fed surveys, delivery times and unfulfilled orders/backlogs have shown some improvement (continued growth but at a slower pace).
- Trends in rail traffic are also improving.
- And news stories on “supply chain issues” have also hit a new high after turning parabolic – which may soon end up being confirmation that peak fear on this issue was showing up in last month’s deeply pessimistic AAII print.
That’s all for now, thanks for listening. And be sure to sign up for our sister podcast, RBC Industries in Motion, which highlights the views of RBC analysts in specific industries.