Earnings Season Provides Only Modest Support

| Alternatives | Multi Asset | Macro Views
Salman Baig
Portfolio Manager, Cross Asset Solutions

Unigestion Adaptive 10

A Global Macro Strategy


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Earnings season for Q4 2021 is in full swing, with over 60% of firms in the S&P 500 and over 35% of firms in the Stoxx 600 having reported thus far. Subdued expectations have led to low hurdle rates for earnings, cleared by 75% of reporting firms in the S&P 500 and 58% of those in the Stoxx 600. As in recent earnings seasons, the market has been less receptive to the results. Looking ahead, healthy (but slowing) global growth and elevated margins, thanks in part to higher productivity, should support 2022 earnings, though too restrictive monetary policy could spoil the profit picture. Strong corporate investment activity should support the markets and the real economy, one of the positive factors behind our modest preference for equities.


 

I’ve Heard that Song Before

Frank Sinatra, 1961





What’s Next?

A familiar tune

Q4 2021 corporate earnings season is shaping up to be quite similar to past earnings seasons: sales and earnings estimates were relatively moderate, and while firms generally outperformed analyst estimates, investors were unimpressed. In aggregate, across the 64% reporting firms in the S&P 500, sales and earnings are up 16% and 27% respectively on a year-over-year basis. The Energy sector is a standout, benefiting from higher energy prices with sales up over 80% y/y (earnings are up over 2800% but that compares to miniscule earnings in Q4 2020). Over 68% of S&P 500 firms have beat their sales estimates, while over 75% have beat on earnings. With a calendar picking up steam this week and 36% of the Stoxx 600 firms having already reported, results thus far are solid: sales are up 26%, while earnings are up 92% (with base effects impacting earnings growth figures). Nearly 75% of Stoxx 600 firms have beat their sales estimates, while 58% have beat on earnings. Despite the healthy results, investors have badly punished the firms missing their estimates and only moderately rewarded the ones that beat theirs: the median 1-day return (relative to the market) of S&P 500 firms missing their estimates was -3.4% while the median return of firms beating was 0.3%. The figures for the Stoxx 600 firms was similar: -2.5% vs 0.2%. As in recent earnings seasons, investors are unimpressed.

Corporate profitability at highs

As we have discussed recently, our Growth Nowcasters point to decent levels of economic activity, even if the pace of economic expansion looks to have slowed considerably. Currently, developed world economies and the overall global economy looks to be expanding at an above-trend pace, which should support continued strong revenue growth. Costs of raw materials, energy, and labour have shot up, as evidenced by increasingly higher price indices. Nonetheless, profitability remains healthy and even improved over recent months: as Figure 1 shows, profit margins are at or above historical highs. The upward trend is especially stark for the energy sector, but also holds true for the broader indices.

Figure 1: Profit Margins (12-month trailing)
Profit-Margins-12-month-trailing
Source: Bloomberg, Unigestion. As of 09.02.2022.

These robust and improving margins reflect a combination of passing costs through to consumers as well as an increase in productivity during the pandemic. Figure 2 shows the annual growth in unit labour costs for nonfarm businesses in the US, reflecting a significant pickup in productivity since mid-2020.

Figure 2: Unit Labour Costs for US Nonfarm Businesses

Unit Labour Costs for US Nonfarm Businesses

Source: Bloomberg, Unigestion. As of 09.02.2022.

2022 EPS estimates trending higher but remain subdued

A still-strong economic expansion combined with robust profitability would point towards strong earnings for this year. Yet consensus estimates are rather dour: 9% y/y growth for the S&P 500 and 6% for the Stoxx 600. For context, median EPS growth has been 10% y/y for both the S&P 500 (1990 to 2019) and Stoxx 600 (2003 to 2019). Figure 3 shows higher revised 2022 EPS estimates, but that change has largely been driven by rising 2021 EPS. Comparing 2022 EPS year-over-year growth estimates today versus the start of 2021, we see no change for the S&P 500 (8.8% vs 8.7%) and in fact lower expectations for the Stoxx 600 (5.7% vs 7.1%).

Figure 3: 2022 EPS Estimates

2022 EPS Estimates

Source: Bloomberg, Unigestion. As of 09.02.2022.

Tightening monetary policy could be a spoiler for corporate earnings: rising short-term rates and bond yields mean higher borrowing costs for consumers and businesses, and the negative wealth effect of higher discount rates may further deter spending. The end of 2021 already saw US personal savings rates tick up, possibly as a precautionary measure. As mentioned above, our Growth Nowcaster has slowed considerably, and the consumption component is now below trend. Monetary tightening into decelerating growth runs the risk of further slowdown, raising the concern of a policy mistake that would put a serious dent into 2022 earnings. However, we believe the Fed will act with more patience and adjust its rhetoric and policy if its actions prove too restrictive (though such a pivot would be months away).

Putting capital to work

The strong revenue and earnings results have helped corporates maintain cash balances at all-time highs. For example, of the S&P 500 non-financial companies reporting thus far, aggregate cash balance sits at 1.4trn USD, down slightly from 1.5trn USD a year ago. The largest use of this cash drawdown has been stock buybacks, which are up 20% q/q and 73% y/y for reporting firms. Indeed, 2021 saw 813bn USD in announced buybacks, second only to 2018’s 939bn USD. For 2022 so far, announced buybacks are just slightly below their 3-year average pace.

The other key use of corporate cash has been capital expenditures, which are up 13% q/q and 18% y/y for S&P 500 firms reporting thus far. As Figure 4 shows, capex has started to recover from the pandemic lows but remains below previous peaks. Having been a major drag for both the S&P 500 and Stoxx 600, the energy sector is now seeing a sharp recovery on the back of strong demand and limited supply.

Figure 4: Capex Growth (year-over-year, 12-month trailing)

Capex Growth (year-over-year, 12-month trailing)

Source: Bloomberg, Unigestion. As of 09.02.2022.

Overall, we have a modest positive view on equities, reflecting the crosscurrents at play today: macro fundamentals are broadly supportive but deteriorating and could collapse if central banks, especially the Fed, tighten too aggressively. Earnings estimates are conservative and lower equity supply should provide support, but various indicators we track suggest that there is room for more downside ahead. Thus, we maintain a relatively light dynamic allocation, with high conviction views reflected in real assets and currencies and only modest exposure to duration and equities.

Unigestion Nowcasting

World Growth Nowcaster

World-Growth-Nowcaster

World Inflation Nowcaster

World-Inflation-Nowcaster

Market Stress Nowcaster

Market-Stress-Nowcaster

Weekly Change

  • Last week, our World Growth Nowcaster moved slightly lower again with less positive data from the US, though Chinese data did improve.
  • Our World Inflation Nowcaster was stable over the week, with most countries seeing inflation pressures largely unchanged.
  • Our Market Stress Nowcaster moved modestly lower over the week, as improving liquidity offset higher volatility and widening spreads.

Sources: Unigestion, Bloomberg, as of 11 February 2022


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Unigestion Adaptive 10

A Global Macro Strategy


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>> Adaptive Strategy Profile