Welcome to RBC’s Markets in Motion podcast, recorded August 2, 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 take a look at week 3 of 2Q reporting season. Last week, well over a third of S&P 500 companies reported results. With the caveat that we are still digesting the mountain of information unleashed on investors last week, here are the big things you need to know:
- First, most of the major trends we’ve been talking about the past couple weeks are still intact.
- Second, four new things stood out to us last week.
- Third, the stock market usually tends to get tripped up in the short term after an early cycle peak in S&P 500 EPS growth.
- Fourth, on COVID, mobility trends remain constructive for now.
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Now, let’s jump into some of the details.
Slide 2
- Takeaway #1: Most of the major trends and themes for 2Q reporting season that we’ve been highlighting over the past few weeks remained intact.
- In terms of the stats – we’re at record highs on the percent of companies beating,
Slide 3
- But individual stock price reactions to earnings remained fairly mixed with 37% of the S&P 500 companies that reported last week rising 1% or more immediately after results, and 31% falling 1% or more in the same time frame. That’s similar to the prior week and 2Q reporting season as a whole.
Slide 4
- Companies beating consensus and raising guidance are still outperforming, and beats are tending to come from the bigger market cap companies.
Slide 5
- In terms of themes, our review of earnings call transcripts continues to indicate that outlook commentary is skewing positive, with the vast majority of companies highlighting robust demand.
Slide 6
- Additionally, most are highlighting strong cash deployment backdrops, and an ability to mostly manage margins and maintain expansion despite intense pressures emanating from supply chains, labor, commodities, and other raw materials. Most companies also continue to discuss COVID/the Delta variant as an element of uncertainty/bumpiness in their outlook but not one that they expect to derail the recovery.
Slide 7
- Takeaway #2: all that being said, I think we learned four new, important things last week.
- First, the stock market is indeed sensitive to slowing growth rates.
- This issue was highlighted in earnings calls for a number of companies that had some of the worst reactions to earnings last week. While a number of Tech an Internet bellwethers were in the spotlight for this kind of commentary, it was also an issue for companies in other sectors.
- First, the stock market is indeed sensitive to slowing growth rates.
Slide 8
- Second, supply chain/commodity/raw materials pressures are likely to endure a while longer.
- Some companies were uncertain as to how long these pressures would endure, while others indicated a few more quarters or through the end of the year. We got the impression that these issues will remain key challenges at least through the balance of 2021. Ocean freight costs also came through in a bigger way last week.
Slide 9
- Third, while many companies continued to highlight labor as a major problem, we also found that some are tackling the problem with efficiency/productivity solutions like automation.
- We exited week three with greater confidence that labor may be a more manageable problem for the broader market than other challenges like supply chains.
Slide 10
- Fourth, on COVID, monitoring mobility is important for keeping tabs on how the Delta variant is impacting the recovery.
- We heard from a lot more Consumer companies last week, and one thing that really jumped out to me is that many of them, as well as some in other sectors, discussed the recovery in demand and /or COVID concerns in the context of mobility.
Slide 11
- Very quickly, takeaway #3: Circling back to the first of the new themes I mentioned, slowing growth – as we highlighted last week and have been highlighting for the last few months, it’s not unusual for slowing growth rates to trip up the stock market temporarily following recessions.
- Historically, coming out of a recession the S&P 500 is down modestly 6 months after experiencing an early cycle peak in the growth rate of S&P 500 EPS. These do tend to be short duration pullbacks, with stocks up 12, 24, and 36 months later.
Slide 12
- Wrapping up with takeaway #4: Circling back to the last of the new themes I mentioned -- the high frequency data we track suggest mobility trends remain constructive, for now.
- Public transit activity, OpenTable restaurant bookings, and TSA flying activity all remain in an uptrend.
- Though the pace of that uptrend has softened a little bit or turned a little bumpy at the margin, for now no major reversal in trend appears to be underway.
- We will obviously keep a close eye on these stats in the weeks ahead.
That’s all for now. Thanks for listening. And please reach out to your RBC representative with any questions.