It’s Data Time

by | April 12, 2021

Since the onset of the global pandemic one year ago, markets have traded almost exclusively off of expectations, not evidence. For example, by the time hard data revealed the extent of the pandemic-induced economic and earnings collapse in mid-2020, global equity markets had already bottomed and were well into what turned out to be a spectacular recovery. Bond yields similarly hit their lows at the end of last summer and then began to zoom higher, long before either accelerating growth or inflation became visible in economic releases. In November, the rotation trade propelled cyclicals, value and smaller capitalization stocks sharply higher, despite no tangible evidence of improving revenues or profits.

In short, the big market moves of the past year have been driven solely by expectations, not facts.

By itself, that is not especially noteworthy. After all, asset prices are barometers of future events, as well as present conditions. Markets typically anticipate future developments. Yet against the backdrop of increasingly stretched valuations – the one-year forward price-to-earnings ratio for the S&P500 is presently around 23 times – the data will soon need to validate embedded expectations, or else the market will falter.

That time is now. 

This week kicks off the first quarter 2021 earnings season in earnest, highlighted by releases from major US banks and financial institutions. The ensuing weeks will see the typical onslaught of reports across all sectors and industry groups.

The bar is high for two reasons. 

First, markets have already discounted much of the good news. That can be seen in the aforementioned stretched valuations, as well as in the observation that global indices are as much as 20% above their pre-pandemic peaks.

Second, analysts have been steadily raising their forecasts for the reporting season. At the middle of last year, consensus estimates hovered below 10% (year-on-year) growth of S&P500 earnings. According to FactSet, that estimate has now risen to nearly 24%, which would be the highest rate of earnings growth since Q3 2018, a time when US profits received a powerful boost from the Trump Administration’s slashing of the corporate income tax rate from 35% to 21%. 

Of course, history suggests that public companies have a clever knack of delivering upside surprises on reporting day. But whether incremental ‘beats’ will be enough to drive the market much higher is now less certain. That is why this earnings season has so much more riding on it. 

But there are two other aspects of company reporting that will draw even greater scrutiny from analysts and investors. 

The first factor is whether the nature of earnings ‘beats’ and ‘misses’ will reinforce the ongoing rotation trade. Recall that the information technology behemoths powered global equity markets higher for much of last year before they ceded ground to cyclicals, which saw their fortunes improve as rising oil prices and higher bond yields brought energy and financials into favor. Those same tech giants are likely to deliver strong first quarter earnings based on their dominant market positions and the powerful secular trends behind online retailing, advertising and media. It is too early to count them out. 

Meanwhile, cyclical and smaller capitalization sectors – such as transportation, industrials or traditional retailing – may only just now be seeing a pickup in their revenues. Might those rotation darlings fall short in the coming weeks? If so, the rotation trade might have to take a back seat, with growth reasserting its dominance.

The second factor will be guidance, which might trump actual earnings. If the ‘C-suite’ now feels that the early data from economic re-opening, vaccinations and fiscal stimulus is sufficient to warrant upbeat messages about the outlook for the rest of 2021, then their confident messages might prove decisive for market leadership. Contrary to the hard numbers, guidance could even favor rotation. After all, what can the heads of Apple, Microsoft, Google or Amazon tell us about their already bright futures that investors have not already gushed over? Encouragement from hard-hit retailers, industrials, automakers and other traditional cyclicals, on the other hand, might spark a fresh round of bargain hunting.

In short, over the next few weeks, the durability of the rotation trade may well come down to whether investors prefer hard data or positive guidance.

Finally, even if the coming few weeks will be dominated by corporate earnings, it would be wrong to overlook key economic releases. This week economists and market participants will focus on US consumer prices (CPI), where the headline index is expected to jump 0.4% month-on-month, accompanied by a tamer 0.1% expected rise in the core measure. Following last week’s sharp jump in producer prices and similar elevated readings in the ISM price indices, however, the bond market will be sensitive to any signs that underlying inflation is accelerating. The Fed’s Beige Book on Wednesday will also be scrutinized for anecdotal evidence of bottlenecks, as well as for signs of price and wage acceleration. Initial jobless claims, retail sales and industrial production (all on Thursday) will provide additional information about the health of the labor market, consumer spending and economic momentum.

As the US and global economies recover from the pandemic recession, the time has come for hard data to drive global equity and bond market performance. The coming few weeks will offer plenty of opportunity to test already demanding expectations. The outcome will determine the overall direction for markets, as well as relative performance. 

Stay tuned.

About the Authors

Larry Hatheway

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy. Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland. From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT. At both GAM Investments and UBS Investment Bank Larry was widely recognized for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others. Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

Alex Friedman

Alex Friedman is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides analysis on economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved. Friedman is a senior leader with two decades of experience growing and transforming organizations in the financial and non-profit industry. He was the CEO of GAM Investments in London and chairman of the firm’s executive board. Previously, he was the Global Chief Investment Officer of UBS Wealth Management in Zurich, chairman of the UBS global investment committee, and a member of the executive board of the private bank. Before moving to UBS, Alex Friedman served as the Chief Financial Officer of the Bill & Melinda Gates Foundation. He was a member of the foundation’s management committee, oversaw strategic planning, and managed a range of the day-to-day operating functions of the world’s largest philanthropic organization. Friedman also created the foundation’s program-related investments group, the largest impact investing philanthropic fund in the world. He started his career in corporate finance at Lazard. Friedman served as a White House Fellow in the Clinton administration and as an assistant to the U.S. Secretary of Defense. He is a member of the board of directors of Franklin Resources, Inc. (Franklin Templeton), a member of the Council on Foreign Relations, Chairman of the Advisory Board of Project Syndicate and a board member of the American Alpine Club. Friedman is a regular contributor to a range of newspapers and thought leadership groups and is also the author of Babu’s Bindi, and The Big Thing, both children’s books. He is an avid mountaineer and rock climber and led the first major climb to raise money for charity through an ascent of Mt. McKinley. Friedman holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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