July 2021 may go down in history as a record month: the most successful movie release post-pandemic (‘Black Widow’), the highest sandcastle ever built (26.16 metres), and the most billionaires in outer space (two: Richard Branson and, likely, Jeff Bezos). The earnings season for Q2 2021 may be more important for financial markets, though.
- After peak economic growth, peak earnings growth is next. More important than the mind-boggling earnings numbers will be the market’s reaction: profit-taking or reignition?
- We remain agnostic here but are trimming our Treasury yield forecast to 1.8% and downgrading value vs growth.
We titled ‘the worst earnings season ever’ here almost a year ago. Now, the opposite is likely: the rebound will be hard to match by anything ever seen before. Of course, the two are interlinked, as the basis for this bumper season is last year’s low quarter. Hence, staggering growth rates are expected: consensus has it that revenues are likely to grow by 20% year-on-year, while earnings should jump by more than 60%. Some sectors are expected to multiply earnings, which shows how borderline this analysis gets. Some companies are turning from losses to profits, which leads to massive spikes in such sectors.
So the stage is set, and the US bank behemoths are opening the season as usual. For financials, consensus goes for a mere 4.4% sales increase, while earnings should… double. Bang! Gauging how much more earnings companies will make on a percentage point of additional revenues (aka ‘operating leverage’) is almost impossible after recessions. In any case, the market’s reaction to blowout numbers will be more interesting: will profit-taking set in as in ‘the best is over’, or will the rally reignite as in ‘more is to come’?
Conclusion for investors
Here as well, we do not try to be smarter than everybody else and remain agnostic. Therefore, we have neutralised quite a few of our growth-related tilts lately. First of all, we have trimmed our outlook for US Treasury yields over the summer from 2% to 1.8%. This is due to peak economic growth and the latest shift in monetary policy. After having neutralised the cyclical calls in the past months, we have also downgraded value versus growth within equity styles. Regarding the regulatory backlash against Chinese internet companies, we recommend turning to other thematic investments.
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