US stocks have had an incredible run, and upcoming results are expected to be good. Our head of markets discusses possible outcomes.
The imminent US quarterly reporting season has extra significance this time around.
The second quarter of 2020 was a period when the market was taking the brunt of the pandemic pain, with lockdown in full effect.
This in turn should make year-on-year comparisons easier, as companies have seen the economic benefit of the vaccine announcement in November and a rebounding economy since.
Hopes are high, however.
Q1 results were exceptional, with an estimated 90% of US companies comfortably beating expectations. Having had another three months to return to some kind of normality, and with some predicting the strongest growth rate since the tail end of the great financial crisis in 2009, there is perhaps more scope for disappointment rather than positive surprise.
Indeed, by some estimates, earnings could be more than 62% higher than the same quarter in 2020.
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The technology sector will be an interesting test of this optimism.
Despite some recent share price difficulties resulting from a switch out of growth and into value stocks based on inflationary fears, the Nasdaq has not only regained its ground but has also pushed to new record levels.
Underneath the bonnet, however, there has been a mixed performance from big tech in the year to date – while Google-owner Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) have added 47%, 30% and 25% respectively, share price growth has been more sedate at Amazon (NASDAQ:AMZN) (up 8%) and Apple (NASDAQ:AAPL) (up 5.5%), with Netflix (NASDAQ:NFLX) actually down 1.2% so far this year.
With expectations also rising for economic growth (according to FactSet Economic Estimates, 13.1% year-on-year growth is now expected for the second quarter, revised up from 11.7% at the end of March), this could be a quarter where companies hit peak earnings, given the tailwinds in place.
In addition, rising commodity prices are also resulting in higher earnings estimate in the oil sector, for example, where the price rose 24% in the second quarter.
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These factors have led to an unusual situation, whereby around 66 companies within the S&P500 have issued positive earnings guidance, that is their estimates are higher than analyst forecasts. The opposite would usually be true, as companies manage down expectations in an effort to outperform when the results are released.
This in itself should be a positive sign.
As is normally the case, the banks will kick off the quarterly reporting season, with JP Morgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) reporting in the week commencing 12 July.
The banks could benefit from further releases of impairment (bad loan) provisions, which could in turn have positive implications for the UK banks, who report around the end of this month.
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Overall, this quarterly reporting season remains an important one in determining the nearer term direction of the market.
With the major indices at or around record highs, buoyed by government and Federal Reserve stimulus, companies will be pushed to meet high expectations.
This in turn will determine whether investors consider that this escalating growth can be maintained, or whether share prices are now actually up with events.
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