Week of May 16 2021

Market Wrap

As of @May 14, 2021

Narratives

One might plausibly ask whether, by the time the Fed gets the "progress" it wants to see, it will be too late to stop it from "progressing" into something more harmful. Fiscal and monetary stimulus is peaking and the acceleration in wages in ominous; and that's a catalyst to simultaneously raise interest rates and cut corporate profits. Inflation causes recessions, and that's why policymakers have historically tried to control it - Michael Hartnett, Bank of America

Earnings outlook for this year is $4 above bottom-up consensus, 2022’s outlook is $7 below. A trio of factors will inhibit any additional valuation expansion in 2021: Decelerating US growth; a real rate-driven rise in interest rates; and the likely passage of tax reform - Goldman Sachs

We’ve seemingly pulled forward what we can for now on the inflation overshoot narrative, all while the Fed continues to message ‘transitory’ while being able to reference the shortfall in the April jobs data to justify a continuation of dove-speak - Nomura

We see tech continuing to struggle pending a Fed pivot or easing from China. That said, a secular inflation view doesn’t preclude a pullback in cyclicals. The transition to “stagflation” entails outperformance from defensive growth names, like staples, big pharma and telcos - Bank of America

Week Ahead

The Federal Reserve and RBA will be releasing policy meeting minutes in the coming week, while central banks in China and South Africa meet to set interest rates. On the economic data front, flash PMI surveys for the US, UK, Eurozone, Japan and Australia will give an insight about the state of the global economy. Other important releases to follow include US building permits and housing starts; Canada and UK inflation data and retail trade; Japan, Thailand and Eurozone Q1 GDP updates; China industrial production; and Australia employment figures.

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America

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Europe

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Asia

FactSet Earnings

Concerns about inflation are rising. Consumer prices increased 4.2% in April, which marked the largest year-over-year increase since September 2008 (5.0%). The rise in consumer inflation is being driven by higher energy prices, which jumped 25% compared to a year ago. Producer price inflation also came in higher than expected for the month. The April PPI was up 6.2%, which was the largest year-over-year increase since the U.S. Bureau of Labor Statistics began tracking this measure in 2010 - FactSet

During each corporate earnings season, companies often comment on topics that had an impact on their earnings and revenues for a given quarter or may have an impact on earnings and revenues for future quarters. Given these concerns, have companies in the S&P 500 commented on inflation during their earnings conference calls for Q1?

To answer this question, FactSet searched for the term “inflation” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through May 14.

Of these companies, 175 have cited the term “inflation” during their earnings calls for the first quarter. This is the highest overall number of S&P 500 companies citing “inflation” on earnings calls going back to at least 2010 (using current index constituents going back in time). The previous record was 163, which occurred in Q2 2018. In addition, the first quarter marked the largest year-over-year increase (+116) in the number of S&P 500 companies citing “inflation” on quarterly earnings calls going back to at least 2010 as well. With about 9% of the companies in the S&P 500 yet to report actual results for the first quarter, the total number will likely be higher than 175 once all the companies in the index have reported actual earnings and conducted earnings conference calls for the quarter.

At the sector level, the Industrials sector has the highest number of companies citing “inflation” on earnings calls for Q1 2021 at 46, followed by the Consumer Discretionary (25), Financials (22), Consumer Staples (21), and Materials (21) sectors. However, the Consumer Staples (84%) and Materials (75%) sectors have the highest percentages of companies that have cited “inflation” on their Q1 earnings calls from March 15 through May 14.

It is interesting to note that the estimated net profit margin for the S&P 500 for Q2 of 11.6% is above the estimate of 11.2% on March 31 but below the record-high net profit margin of 12.7% recorded in the previous quarter (Q1 2021).

Metric	UpDn	This Week	Prior Week	Comments
Forward 12-mo Estimate	🔵	190.12	189.96	vs. @December 31, 2020 $159.02
2y Combined Average Growth Rate %	🔵	7	6	vs. @December 31, 2020 3%
Forward 12-mo PE	🔵	22	21.6	vs. @December 31, 2020 26x
Earnings Yield	🔵	4.56	4.49	vs. @December 31, 2020 4.23%

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FactSet Charts

S&P 500 Futures

Monthly Timeframe (Full Session) - While the macro backdrop remains supportive, LTF breakouts have (all) been (eventually) retested. The preceding sentence was carried forward for the past several weeks for a reason. Despite the remaining MTF 4017.25 single, last week's price action certainly qualified as a Secondary Test of the 3950 breakout. Of note, MTF configuration remains 1TFU.

Weekly Timeframe (Full Session) - WHI 4238.25 printed on Sunday Globex is carried forward as a weak ETH high in addition to the departure singles (4190.75 & 4214.00) indicative of unfinished business above. That said, the market has no obligation to immediately repair poor structure.

240min Bars (Full Session) - The case can be made that the upward drift in Weeks 14→17 was owed to an absence of selling pressure (see Pane 3). Clearly, that pressure arrived last week all at once, which resulted in the largest down wave volume of the year, and an arguably overdue Secondary Test of TR 3720.50 → 3978.50. Moreover, it is plausible that last week's range could ultimately evolve into yet another +200pt TR similar to the earlier 2021 trading ranges above highlighted. Odds favor interim consolidation as price settled just above the midpoint of the 100pt W16-W18 TR 4110.50 → 4211.00. Intermediate Timeframe (ITF) participants will likely be bullish above and bearish below this range.

30min EquiVolume Bars (Cash Session, Monday → Friday) - The Friday cash session birthed yet another Gap Up; there are eight open gaps in the wake of the '20 recovery cycle. Moreover, Friday's High came within 1-tick of closing Monday’s (5/10) 4178.50 Gap Down. Odds favor repair of the poor structure both above and below Friday's RTH range.

P&F 5x3 (Full Session) - We use a P&F to observe Wyckoff Method markers (which have amazingly stood the test of time). The selloff was preceded by an Upthrust that was preceded with diverging Effective Volume (Pane 2). Conversely Friday’s break back above the ITF Supply Line was foreshadowed by poor Effort vs. Reward on the part of responsive sellers presumably keying off this level (summarily forced to cover into the close). Notice the convergence of: the ITF Supply Line; the TR 4110.50 → 4211.00 LO; and the $Gamma Volatility Trigger. This makes for an easily eyed 4110 opening pivot.

Bull vs Bear

This Week

Bulls will seek to maintain control above the opening pivot, 4110.00, coinciding with maintaining TR 4110.50 → 4211.00. Ideally, day timeframe 1TFU quickly develops and value is established above Friday's High 4178.25 on a closing basis.

Last Week

Bulls will seek to maintain control and ideally establish value above TR 4110.50 → 4211.00. Opening pivot is 4192.00 (-0.79%). ITF bullish configuration above the 4175.00 (-1.19%) Volatility Trigger.

Bears will seek to regain control below the Supply Line 4110.00, ideally quickly closing Friday's 4126.75 Gap and attracting new momentum. WLO 4029.25 (-3.65%) retest would more than likely require a catalyst as odds favor an Inside Week consolidation.

Bears will seek to contain follow-through and ideally force an early secondary test of the TR 4110.50 → 4211.00, and ideally break and hold below the $Gamma Call Wall at 4192.00 (-0.79%).

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