Week of Jan 24 2021

Market Wrap

As of @January 22, 2021

Narratives

Although we concur with the general thesis behind the reflation trade assuming the new administration can deliver persistent fiscal support, the slow moving economic drivers have yet to move in the direction that would substantiate this view, which calls for caution on breakeven potentially running too hot - Jiefu Luo and Jose Gonzalez, Deutsche Bank

DC’s policy bubble is fueling Wall Street’s asset bubble. The Fed is just monetizing the deficit. This was not only the case prior to COVID but also isn’t solely a US phenomenon; virtually all large western economies are engaged in the same exercise. Wall Street inflation will likely drag Main Street inflation higher, risking a disorderly rise in bond yields (taper tantrum), tighter financial conditions, and volatility events - Bank of America Global Investment Strategy

It's not even the end of January 2021 and "The Reflation Trade" might be coming into question already. Things have turned a bit more defensive in the speculative proxies and risk-premia space in recent days. Investors should watch for weakness, while keeping an eye out for a dollar rally and/or weaker corporate bonds, as those would be signs of tightening financial conditions - Nomura

Homeowners are smiling because they’re seeing price increases. Not smiling, though, are people trying to buy a home. Today’s market is unhealthy; demand for mortgages larger than $766,000 easily outstripped demand for loans to buy more modest abodes. Buyers may be rushing into things without thinking it through; prices are rising way above income growth - NAR

Week Ahead

In the US, it will be a very busy week of economic data including fresh GDP growth figures, Fed's monetary policy decision and corporate earnings, with reports from Apple, Microsoft, Facebook and Tesla. Investors will continue to focus on the pandemic, specially on new and more-contagious strains and will carefully monitor President Biden's legislative agenda in a divided Congress. Elsewhere, the IMF is set to release its World Economic Outlook and growth figures from Germany, Mexico and Hong Kong will also be in the spotlight.

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America

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Europe

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Asia

Earnings

Overall, 13% of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 86% have reported actual EPS above estimates, which is above the five-year average of 74%. If 86% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. - FactSet

At this point in time, more S&P 500 companies are beating EPS estimates for the fourth quarter than average, and beating EPS estimates by a wider margin than average. As a result, the index is reporting higher earnings for the fourth quarter today relative to the end of last week and relative to the end of the quarter. Despite the increase in earnings, the index is still reporting a year-over-year decline in earnings, mainly due to the negative impact of COVID-19 on a number of industries within the index. But, if earnings continue to surpass estimates at current levels, it is likely the index will report year-over-year earnings growth for the quarter for the first time since Q4 2019.

In aggregate, companies are reporting earnings that are 22.4% above the estimates, which is also above the five-year average of 6.3%. If 22.4% is the final percentage for the quarter, it will mark the second-largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008. Due to the number and magnitude of these positive EPS surprises, the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the fourth quarter is smaller now relative to the end of last week and relative to the end of the quarter

As of today, the S&P 500 is reporting a year-over-year decline in earnings of -4.7%, compared to a year-over-year decline in earnings of -6.7% last week and a year-over-year decline in earnings of -9.2% at the end of the fourth quarter. Positive earnings surprises reported by companies in the Financials and Information Technology sectors were mainly responsible for the decrease in the overall earnings decline during the past week. Positive earnings surprises reported by companies in the Financials sector (led by JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley) have also been mainly responsible for the decrease in the overall earnings decline since the end of the fourth quarter.

If -4.7% is the actual decline for the quarter, it will mark the fifth-largest (year-over-year) decline in earnings reported by the index since Q3 2009. It will also mark the fourth straight quarter and the seventh time in the past eight quarters in which the index has reported a year-over-year decline in earnings. Five sectors are reporting year-over-year earnings growth, led by the Financials, Materials, and Health Care sectors. Six sectors are reporting (or are predicted to report) a year-over-year decline in earnings, led by the Energy, Industrials, and Consumer Discretionary sectors.

In terms of revenues, 82% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 62%. If 82% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting revenues that are 3.0% above the estimates, which is also above the five-year average of 0.9%. If 3.0% is the final percentage for the quarter, it will mark the largest revenue surprise percentage reported by the index since FactSet began tracking this metric in 2008. As of today, the S&P 500 is reporting year-over-year growth in revenues of 0.7%, compared to year-over-year growth in revenues of 0.4% last week and year-over-year growth in earnings of 0.1% at the end of the fourth quarter. Positive revenue surprises reported by companies in the Financials and Information Technology sectors were mainly responsible for the increase in the overall revenue growth rate during the past week.

If 0.7% is the actual growth rate for the quarter, it will mark the first time the index has reported year-over-year revenue growth since Q1 2020. Six sectors are reporting (or are projected to report) year-over-year growth in revenues, led by the Health Care and Consumer Discretionary sectors. Five sectors are reporting (or are predicted to report) a year-over-year decline in revenues, led by the Energy and Industrials sectors.

Metric	This Week	Prior Week	Change	Comments
Forward 12-mo Estimate	169.79	168.62	1.1699999999999875	New 4-quarter period is now Q1 ’21 through Q4 ’21 or calendar 2021.
Forward 12-mo PE	22.6	22.3	0.3000000000000007
Earnings Yield	4.42	4.49	-0.07000000000000028	Continuing to walk up from the low of 4.29% in late Dec ’20.
2y Combined Average Growth Rate %	3	3	0

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - January 1TFU relative to December with range extension and settlement just below mVAH.

Weekly Timeframe (Full Session) - Outside Week and 1TFU continuation with constructive position of close despite moderate pullback on Friday. The prior week high (WHI.1 3820.75) is our short-term pivot.

P&F 5x3 (Full-session, Composite Profile 6-weeks) - Spring formation off Secondary Test of WLO.1 (3741.50), resulting in a new ATH (3859.75). ITF Demand Line shown above with potential for more back & filling on sustained break below 3775. Some delta divergence apparent between Thursday and Friday but the volume is less than prior liquidation breaks.

Bull vs Bear

Bulls will seek to maintain price acceptance above 3800 and ideally the WHI.1 3820.75. ITF Trend Configuration intact above 3775.00.

Bears will seek to break and hold below 3800 and ideally 3775.00 on a closing basis to signal ITF trend cessation.

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Last Week's Bull vs Bear

Indicators

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Positioning

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Sentiment

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Optix

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Volatility

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Breadth

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Disclaimer

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Sources