Week of Apr 11 2021

Market Wrap

Narratives

The combination of an early auction schedule and CPI / retail sales will once again highlight the two defining themes of 2021; building issuance and fiscal-stimulus inspired consumption and inflation. This is by no means new territory for the market, it does come at a particularly pivotal moment as investors appear to be actively recalibrating the extent to which yields can back up without a meaningful acceleration of organic growth outside of that owing entirely to Washington’s fiscal endeavors - Ian Lyngen & Ben Jeffery, BMO

Week Ahead

First-quarter earnings season gets underway next week, with updates expected from major banks such as JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Wells Fargo. On the economic data front, important releases to follow include US and Eurozone retail sales and industrial production figures; UK monthly GDP; China Q1 GDP and trade balance; Australia employment data, business and consumer morale; and India inflation and industrial output. Central bank meetings will be held in South Korea, New Zealand, Singapore and Turkey.

FactSet Earnings

As of today, the S&P 500 is expected to report (year over-year) earnings growth of 24.5% for the first quarter. Based on the five-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of at least 28% for the first quarter, which would be the highest earnings growth reported by the S&P 500 in more than 10 years - FactSet

When companies in the S&P 500 report actual earnings above estimates during an earnings season, the overall earnings growth rate for the index increases because the higher actual EPS numbers replace the lower estimated EPS numbers in the calculation of the growth rate. For example, if a company is projected to report EPS of $1.05 compared to year ago EPS of $1.00, the company is projected to report earnings growth of 5%. If the company reports actual EPS of $1.10 (a $0.05 upside earnings surprise compared to the estimate), the actual earnings growth for the company for the quarter is now 10%, five percentage points above the estimated growth rate (10% - 5% = 5%).

Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.9% on average. During this same period, 74% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has typically increased by 4.6 percentage points on average (over the past five years) due to the number and magnitude of positive earnings surprises.

If this average increase is applied to the estimated earnings growth rate at the end of Q1 (March 31) of 23.8%, the actual earnings growth rate for the quarter would be 28.4% (23.8% + 4.6% = 28.4%). If the S&P 500 reports year-over-year growth in earnings of 28.4% in Q1, it would mark the highest (year-over-year) earnings growth rate reported by the index since Q3 2010 (34.0%).

However, during the past three quarters (Q2 2020 through Q4 2020), actual earnings reported by S&P 500 companies have exceeded estimated earnings by 19.0% on average. During these three quarters, 82% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 13.8 percentage points (on average) due to the number and magnitude of positive earnings surprises over these past three quarters.

If this average increase is applied to the estimated earnings growth rate at the end of Q1 (March 31) of 23.8%, the actual earnings growth rate for the quarter would be 37.6% (23.8% + 13.8% = 37.6%). If the S&P 500 reports year-over-year growth in earnings of 37.6% in Q1, it would mark the highest year-over-year earnings growth rate reported by the index since Q2 2010 (41.5%).

Of the 21 S&P 500 companies that have reported actual earnings for Q1 2021 to date, 81% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 21 companies have exceeded estimated earnings by 9.8%. Thus, at this very early stage of the Q1 earnings season, the number of companies reporting positive earnings surprises is trending closer to the number of the previous three quarters, while the magnitude of the positive earnings surprises is trending closer to the five-year average. Since March 31, the earnings growth rate for the S&P 500 has improved by 0.7 percentage points (to 24.5% from 23.8%).

S&P 500 Futures

Bull vs Bear

This Week

Bulls will seek to maintain control and ideally maintain value above 4100 (-0.47%). ITF bullish configuration remains intact above 3965 (-3.75% Vol Trigger). LTF change of condition on a break of 3928.75 (WLO.1 -4.63%) on a closing basis.

Last Week

Bulls will seek to maintain control and ideally establish value above last week's range. ITF bullish configuration remains intact above 3900. LTF change of condition on a break of 3843.25 (WLO.1 -4.16%) on a closing basis.

Bears will seek to contain range extension above 4100.00. In their favor, the lack of selling pressure thru last week implies one-sided market positioning, which if and when unwound could create a fast trip back down to 4021.00 WLO (-2.39%) and cessation of 1TFU.

Bears will seek to contain range extension above last week's high (4017.00). In their favor, the lack of selling pressure thru last week implies one-sided market positioning, which if and when unwound could create a fast trip back down to 3928.75 WLO (-2.03%) and cessation of WTF 1TFU.

Indicators