Home Knightsbridge Insights Commentary: Paul Ebeling on Wall Street, Q-2 Earnings’ Season Kicksoff

Commentary: Paul Ebeling on Wall Street, Q-2 Earnings’ Season Kicksoff

by Paul Ebeling



Investors should be focused on 3 Key Q’s for companies heading into earnings season: How firms will maintain profit margins given rising input costs and supply chain shortages, how companies plan to prioritize cash spending, and how policy uncertainties especially around taxes affect their outlooks. 

Major companies will begin releasing their Q-2 results Tuesday with the big banks JPMorgan Chase and Goldman Sachs. With results driven by strengthening consumer demand as VirusCasedemic-related restrictions eased early this yr, S&P 500 companies are expected to see aggregate earnings grow by 67% over last yr, according to FactSet. This would accelerate from Q-1’s growth rate of about 50% and mark the fastest pace for the index since Y 2009.

Also this wk Fed Chairman Powell testifies before Congress with his semi-annual Monetary Policy Report Wednesday and Thursday. Stay tuned

Overall Outlook Worldwide

For all the dominance of megacap growth names, American stocks led the world during the cyclical upswing in 1-H of the year and that means regions outside the US are primed for a catch-up.

Take Europe, with a far more economically sensitive equity market, a vaccine roll-out finally closing the gap to the US and business activity gathering speed, firms from Lombard Odier to BlackRock Inc. are recommending investors boost their exposure to the region.

The post-virus chaos growth relay has shifted from China to the US and to the Euro zone.

At the same time, a US index of value shares outpaced a rest-of-world gauge by more than 6%, according to MSCI Inc. indexes.

  • S&P 500 +16.3% YTD
  • Russell 2000 +15.5% YTD
  • NAS Comp +14.1% YTD
  • DJIA+13.9% YTD

It all means European shares look cheap. Members of the Stoxx 600 trade at less than 17X expected earnings Vs 2!X for stocks in the S&P 500.

In the UK it is even more dramatic; FTSE 100 Index companies trade at an average of 13X the coming year’s earnings.

“Eurozone and UK equities still trade at relatively cheap multiples, despite their exposures to both the global recovery and the reflation themes,” the chief investment officer at Lombard Odier, wrote in a note. “These are where we see the greatest likely benefits from economic re-openings, an acceleration in relative earnings momentum as well as attractive valuations.”

And while European equity funds drew $16-B last Quarter, the strongest flows in 4yrs they stand to gain even more given $230-B of outflows over the last 3yrs.

It helps that the region’s economic growth is also likely to accelerate: European Union officials markedly raised their outlook for the Euro-area economy last wk.

“We see a sizeable pickup in activity helped by accelerating vaccinations,” BlackRock Investment Institute strategists wrote in their mid-year outlook this week, as they shifted to overweight on European shares and to neutral on US equities. “Valuations remain attractive relative to history and investor inflows into the region are only just starting to pick up.”

The Bull case depends on a conviction that economic momentum is poised to accelerate.

Treasury yields sunk to a four-month low last wk, and a long-short value strategy is down again in July after sliding the most since January 2020 last month. Giant growth shares like Amazon.com Inc. and Apple Inc, the kind Europe does not have.

Strong EPS momentum should provide further support for global equities in 2-H of Y 2021. The UK looks like a good value trade.

Remember, it is your money, so your responsibility, pay attention.

Have a prosperous week, Keep the Faith!

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