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April 28, 2021
  • Bumper earnings season in Q1 2021 for S&P 500
  • UPS stock surges on the back of earnings surprise

This week we take a special look at bumper earnings season in Q1 2021

Earnings season for the first quarter of 2021 is in full flow, with all signs pointing to a stellar season. 25% of S&P 500 companies have reported so far. Of those, an extremely high number – 84% – have reported earnings per share (EPS) surprises. Net profit margins are at their highest levels since the 3rd quarter of 2018 at 11.6%, 1pp above the five-year average. 

Earnings are growing at 33.8% YoY basically, reflecting a strong rebound in many industries (and the low 2020 base from which they are being compared). Surprises are being led by healthcare, financials, communication services and IT companies.

Indeed, there is no let up expected. Looking ahead, analysts are projecting double-digit earnings growth for the remaining three quarters of the year, with a peak expected in Q2 2021 at +55.4%.

The incredible level of positive earnings surprises demands some degree of explanation. It has a lot to do with the base effect:it’s been extremely difficult for analysts to forecast the degree of recovery across many different sectors during an ongoing pandemic. Happily, the recovery has been better than expected.

Another important reason is that many companies responded to the pandemic by implementing cost restructuring plans. In many cases, the impact of these measures could be surfacing during this earnings season.  

If the analysts are right this time, however, Q1’s bumper earnings seasons will be the first of many this year.

Troubling signs for India’s economy in the months ahead

India’s devastating second Covid wave is expected to have a strong impact on GDP in the second quarter of 2021, which had been forecast to be flat. By some estimates, we could expect a double-digit contraction (-10%) in GDP quarter-on-quarter, after India’s GDP gained 2.6% inQ1. Household spending is already showing signs of slowing, with quarterly car sales down 6.1% in Q1, reversing part of the 20% rise in previous quarter. 

Turning attention to China, the recapitalisation of the country’s financial sector is edging closer with the People’s Bank of China stepping in to take on RMB 100bn (c. USD 15bn, 0.1% of GDP) of assets in the troubled Huarong Asset Management Corporation, China’s largest distressed debt investor. Huarong was set up following the Asian financial crisis of the 1990s to take over non-performing loans from state-owned banks but has come under intense scrutiny recently after missing a deadline to report earnings at the end of March. China’s central bank is expected to provide further support for the financial sector to avoid the private sector being starved of funds in the coming months and quarters.

US consumer confidence nearing pre-pandemic levels

Momentum in the US economic recovery continues to gather pace, following very strong retail sales numbers last week. Consumer sentiment improved sharply in the month of April to 121.1 from 109.7 the previous month, well above consensus. That represents the highest reading since February 2020’s 132.6 level, just before the pandemic struck the States. Soaring consumer confidence has without doubt been helped by the latest round of stimulus measures, as well as strong labour market conditions and a vaccination programme that is rolling out at pace.

  • 3rd May: Germany’s Manufacturing Purchasing Managers Index will indicate whether Europe’s economic powerhouse is suffering from the effects of continuing coronavirus restrictions.
  • 7th May: April’s non-farm payroll figures are expected to show continued strength in the US labour market as the US recovery gathers pace.

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