Citius, altius, fortius?*
As summer draws to a close, it is clear that the Delta variant and the resurgent pandemic have failed to trip up the forward march of the equity markets.
Over July and August, the European market jumped 4%1, while the increase in the US was more than 5%2. Better still, NASDAQ and its technology stocks advanced 7%3. Even as unprecedented monetary and fiscal support continue to explain such performance, second-quarter corporate earnings have been a major factor.
In Europe, two-thirds of corporations published better-than-expected revenues and earnings. And those expectations had actually been raised since the start of the year. In an unusual sequence starting in January, the analyst community had gradually raised the consensus for quarterly earnings by 50%. This meant the Stoxx 600 index saw quarterly earnings soar by nearly 190% compared to the same quarter last year, which admittedly had been quite depressed. This jump was “just” 8% compared to the same quarter in 2019. Beating expectations is still a powerful stock-market driver.
The same news came from the United States, where S&P 500 earnings leapt by more than 90%. Taken together, the companies in this index posted a 27% jump in earnings compared to the second quarter of 2019. The US index, loaded with tech stocks including the GAFAM – which were crisis-proof in 2020 – is still in the lead in the race to higher profitability. As we know, US earnings have multiplied by 2.5 since 2007, while Europe should finally be able to see that level again this year.
Needless to say, with the markets’ demanding valuations, the second half will also stand out for the importance of its earnings releases. It will be impossible to keep up this pace of growth for the second quarter, and accidents will, without a doubt, be severely sanctioned.
At a time when the US Federal Reserve is beginning to work out a partial and gradual exit strategy from its unconventional policy, the word “inflation” has featured in virtually every comment from business leaders during earnings conferences. In fact, this would be the all-time record number of times it has been mentioned4. Adding to this are fears over supply chains and the lack of qualified workers.
As such, being able to anticipate growth in profits is still the key to this second part of the year. Unlike government bonds, businesses and their capacity to adjust their prices are good protectors when ‘transitory’ inflation seems to be anything but.
After highly indexed market movements – sector or style – every corporation will have to use its earnings to justify its valuation. As is often the case, picking well will afford the best protection in an economic and public health environment that is projected to be more volatile.