Weekly Investment Strategy

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Companies have found new ways to operate post-Covid
  • Inflation surge as a learning opportunity for firms
  • Record net margins despite rising wages

Earlier this week we celebrated National Book Lovers Day, the perfect day to cozy up with your favorite book and read the day away! Whether you prefer fiction or non-fiction, paperback or electronic, a new release or one of the classics, reading is so important. And with more than 96% of the S&P 500’s market capitalization having reported results for the 2Q21 earnings season, we’ve been doing our fair share of reading as we comb through earnings call transcripts. While the ‘headlines’ from earnings are attention grabbing–healthy earnings growth, record sales beats, record margins and optimistic future guidance–analyzing the fine print from these conference calls–especially as it relates to forward guidance–provides even more color in understanding the state of the earnings environment as the next ‘chapter’ of this economic recovery unfolds.

  • An Earnings Season For The Record Books | The 2Q21 earnings season will unofficially end next week once retail giants Walmart and Target report, but our expectations for above-average results will be no ‘cliffhanger’ with spectacular earnings growth of ~+90% on top of 1Q21’s ~+50%. The magnitude of earnings beats remained far above the historical average at ~17%. As a result, the consensus 2021 S&P 500 earnings estimates have risen 20% since the start of the year, including 4% alone since the 2Q21 earnings season began, and are now just ~$1 shy of our expected $200 estimate! The below ‘cliff notes’ version of CEO commentary provides further real-time support of our macroeconomic views.
    • Will We Turn The Page On COVID-19? | While nearly a third of S&P 500 companies specifically referenced the Delta variant during their conference calls, most were sanguine about the recent surge of COVID cases, with Verizon stating that “people will continue to remember the value of connectivity.” However, given they reported most recently, travel-related companies displayed the most concerns. Booking commented that the Delta variant lends to some “volatility and uncertainty around the exact timing and shape of the recovery for travel,” but that their confidence in an eventual “strong recovery in travel demand globally” has not wavered. This was echoed by Expedia, who said they are still experiencing “relatively stronger performance compared to earlier parts of COVID.” In fact, some hotel companies such as Hilton observed that all of their “bookings for 2022 are at rates that are greater than 2019” and that momentum should carry into 2022 “simply because people have to meet.”

      Bottom Line: While COVID remains the biggest downside risk to the economy and earnings (especially in the services industries), full scale lockdowns are unlikely. Most companies continue to look through the recent surge highlighting that they have been resilient, finding ways to operate successfully in this new environment.

    • When Will The Inflation Chapter Come To A Close? | The presence and severity of supply chain disruptions varied across companies, but in the aggregate, the mindset was that inflationary pressures would be temporary. For example, Tractor Supply Co stated it is “starting to see (supply chain disruptions) moderate a bit” with ongoing improvements expected in the next 6-12 months. Some companies are viewing the situation even more positively, such as Microsoft sharing that the pandemic allowed them to revamp their sales, customer service, marketing, supply chains, and digital manufacturing with a “AI-first and collaboration-first” approach, and Ford, viewing the semiconductor shortage as a “huge opportunity to learn how to manage the supply chain differently” and better position themselves against a black swan event in the future.

      Bottom Line: Inflation has helped corporate earnings as modest price increases have been absorbed by consumers. However, as supply chain disruptions improve and inventories increase, inflationary pressures should subside by year end.