Welcome to RBC’s Markets in Motion podcast recorded October 26th, 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 run through our latest thoughts on investor sentiment and 3Q reporting season, where we review the data and company commentary through Friday.
Two big things you need to know:
First, on sentiment, optimism continued to build among individual investors last week, while institutional investor positioning stabilized. Second, reporting season stayed “good enough” for the stock market to keep moving up last week, in terms of both the stats and the company commentary.
If you’ve got five minutes, let’s jump into a little more detail. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major podcast providers. Now, the details.
- Takeaway #1, optimism continued to build among individual investors last week, while institutional investor positioning stabilized.
- In our last few podcasts, we’ve highlighted how sentiment among individual investors had started to turn bullish again in the weekly AAII survey in mid-October, after briefly dropping into deeply bearish territory in September (when the bears were so dominant, a contrarian buy signal was in place for the stock market on both a 3 and 12 month forward basis).
- In the latest update, which captures data as of the middle of last week, bullishness rose for the second week in a row, with a move to 46.9% from 37.9% the prior week. The bulls now outnumber the bears by 19%. If this pace keeps up, we’ll soon need to be monitoring whether individual investor sentiment has gotten too bullish. But the good news for now is that this indicator is still well below the 30% threshold (in favor of the bulls) that often proves problematic for the stock market on a forward looking basis.
- These shifts in individual investor sentiment have occurred against the backdrop of what has been a deterioration in institutional investor sentiment, as seen through the lens of the weekly CFTC data on asset manager positioning in US equity futures – at least up until last week. In the latest update for that data set, overall positioning for US equities stabilized after declining for 5 weeks in a row.
- It remains to be seen whether last week’s stabilization represents a pause in the institutional investor sentiment unwind, or a premature end to it. While Small Cap and Nasdaq futures positioning doesn’t look particularly concerning at current levels, positioning in US equity futures broadly and S&P 500 contracts specifically still looks elevated.
- Takeaway #2, reporting season stayed “good enough” for the stock market to keep moving up last week, in terms of both the stats and the company commentary.
- In terms of what we are seeing so far in the stats….
- The percent of companies beating consensus estimates on EPS and revenues has come down a little from the extreme highs of the past few quarters, but remains very strong and elevated relative to history - 85% for EPS, and 78% for revenues.
- Additionally, beats are being rewarded to a similar degree as last quarter, while misses are being punished much more severely. The intensity of the reaction has been much stronger for the misses than the beats.
- Something else we noticed late last week, is that even though the rate of upward EPS estimate revisions in the broader market has been falling, hitting 54% in our latest update, bottom-up S&P 500 EPS forecasts in dollar terms for 2021 have actually managed to move up a little bit over the past few weeks from $202 over the past few weeks to $204 as of Friday morning.
- In terms of company commentary...
- Guidance trends are mixed, but overall outlooks and the tone around underlying demand (or appetite to spend) remains quite strong. The concepts of pent up, delayed and unmet demand are recurring themes. A fair number of companies have also discussed how softness in August due to the Delta variant has faded with improving trends seen in September and/or October.
- Margin commentary remains mixed, and has come across to us as a little weaker than last quarter. Inflation pressures remain abundant and top of mind, but pricing power also continues to be emphasized. On energy/commodity a number of companies have also highlighted how hedging has helped and surcharges are being employed.
- We haven’t really heard anything new on supply chains, but we have been tracking the list of related issues that are coming up in supply chain discussions. Labor and inflation/pricing have been brought up the most, followed by COVID and logistics and ports.
- While the supply chain situation continues to be described as quite challenging a few companies have alluded to the idea that supply chain problems will be temporary as opposed to longer-term or structural. Overall, the thing that continues to jump out to us the most on this issue is the emphasis many companies are still putting on how they are managing through and facing the challenge head on.
- The rails and retailers we’ve heard from are throwing everything including the kitchen sink at this problem.
- One of my favorite quotes came from a major toy company. They said clearly that they are ready for the holiday season and will be able to meet the strong demand they expect to come. In explaining why, they said, “We anticipated short supply and longer lead times and factored that into our planning with mitigating actions. For example, we expedited procurement of raw materials, pulled forward finished goods production to increase capacity, invested in additional tooling to dual source manufacturing of critical product lines, leveraged our diverse manufacturing footprint to optimize near-shoring of production, contracted ocean freight capacity and rates in advance, and secured access to additional ports and shipping lanes.”
- We’ve heard about over ordering and extending lead times from a few other companies as well.
That’s all for now, thanks for listening. If you are interested in hearing updates from RBC analysts in specific industries, be sure to check out our sister podcast, RBC’s Industries in Motion.