Halftime Report For 4Q21 Reporting Season Transcript

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Welcome to RBC’s Markets in Motion podcast recorded February 7th, 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. Today in the podcast, we run through our main takeaways on 4Q21 reporting season so far, with over half of S&P 500 results in through Friday.

Four big things you need to know:  First, the earnings resiliency we’ve been highlighting solidified over the past week, supporting the stock market. Second, early sector standouts include Tech, Energy, and Health Care. Third, our quantitative transcript review suggests confidence has slipped a little, along with demand and margin views. Fourth, our manual review of earnings calls transcripts has kept us vigilant on the consumer, but not panicked.  

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Now, the details.

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  • Takeaway #1: The earnings resiliency we ‘ve been highlighting solidified over the past week, supporting the stock market.
  • The full year bottom up forecast for S&P 500 EPS is now tracking at $225 for 2022 (up $1 from a week ago and mid January’s reading), while 2023 is tracking at $248 (up $2 from mid January’s reading and $1 from a week ago). 2021 EPS has also moved up to $209.

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  • The rate of upward revisions (current year and next year combined) is tracking at 56% over the past four weeks (so slightly more positive than negative revisions).

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  • For reporting season as a whole, stock price reactions haven’t been great. 47% of the S&P 500 companies that have reported so far have seen their share prices fall 1% or more in the one day trading session immediately post results. But this stat has continued to improve. Two weeks ago it was tracking at 63% and a week ago it was tracking at 53%.

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  • Takeaway #2: Early sector standouts include Tech, Energy, and Health Care.
  • Classic Tech (which excludes internet names) has been the best sector in terms of stock price reactions to earnings so far. At a little more than 50%, it’s the sector with the highest percentage of companies with their stock prices up 1% or more immediately post earnings.

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  • Separately, on 2022 EPS growth forecasts (in percentage terms), expectations have improved for Energy, Materials, Health Care, and Tech while deteriorating for Consumer Discretionary, Communication Services, Financials and Utilities.

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  • Through a slightly different lens – the rate of upward revisions for both EPS and sales – Financials, REITs, and Energy (and to a lesser degree Tech and Health Care) have outranked the other major sectors.
  • Overall, the positioning trades still feel a little messy right now. But across all of the metrics I just mentioned Tech, Energy and HC seem to be the ones popping up the most as looking best.

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  • Takeaway #3: Our quantitative transcript review suggests confidence has slipped a little, along with demand and margin views.
  • In addition to reading through as many S&P 500 earnings call transcripts as we can, we’ve started to use Bloomberg’s transcript analyzer tool to get an objective read on the trends in some of the hot topics of the past few reporting seasons. I’m not going to run through all of the takeaways here and would urge you to check out the charts on pages 15 through 30 of the report.
  • A couple of the findings that I think are most important:
    • (1) First, net confidence levels have been high, though we did see confidence slip a little in January.

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  • (2) Second, the demand discussion has continued to tilt positive in early 2022, but at a less intense pace than late 2021.

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  • (3) Third, the margin discussion has degraded to start the year, and is now tilting slightly negative, but it’s not clear that this matters to the actual path of margins anymore as there has been a dramatic decoupling between margin commentary and actual margin trends in recent years.

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4) Takeaway #4: Our manual review of earnings calls transcripts has kept us vigilant on the consumer, but not panicked.

  • Despite on IT Services comments about weakness in lower end consumers, we haven’t been convinced that the US consumer is in trouble. To be sure, a few companies have talked about keeping a close eye on the consumer, particularly the lower end, or have noted how difficult it’s become to predict the consumer recovery.

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  • But we’ve seen more discussion highlighting how strong the consumer is overall and have been more struck by how confident some of the Airlines and Cruise Lines have been about the recovery in bookings that they either expect or, in some cases, have already started to see. Along with Tech and Health Care, Consumer companies will be more in focus in the next few weeks, and we will hopefully get more color on what’s going on here.

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  • In terms of some of the other things we’ve learned -- many companies, across multiple sectors, expect 2022 to get better. Some have made that assertion on margins, others on Omicron, others on costs, and some on entirely different challenges. This idea is already embedded in consensus expectations, with EPS growth expected to be 5-6% in the 1st half and 8-12% in the 2nd

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  • Additionally, while discussion about interest rates and the Fed has seemed a little more prevalent, we are not seeing alarm about it.

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That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for deeper dives on specific sectors from RBC’s team of equity analysts.