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July 28, 2021
  • Regulatory crackdown sees $700bn wiped off Chinese internet stocks since February peak
  • Bumper Q2 2021 earnings season for S&P500

Q2 2021 earnings season

The earnings season for Q2 2021 is well underway, with around a quarter of S&P500 companies having reported so far. Already, it’s looking like another bumper earnings season as US companies benefit from the economy’s reopening.

 A remarkable 88% of companies saw their actual earnings-per-share exceed estimates – that’s a record high level. The year-on-year EPS growth is expected to be 74.1% (+64.3% excluding energy), the largest in more than a decade.

The surprise factor stands at 19%. Sector wise, surprises have been led by financials, industrials and consumer discretionary. Utilities and real estate have been weaker, mainly due to their models being more predictable. Encouragingly for investors, net profit margins are looking very strong too, indicating that higher input prices are being successfully passed on to consumers.

There can be no doubt we are seeing extraordinary levels of EPS growth and earnings surprises on the upside. Much of this can be attributed to the reopening of the economy and it is likely that we are seeing the peak of EPS growth, with weaker levels expected in Q3 and Q4 of this year. Despite the normalisation, earnings growth for the rest of the year is still expected to be supportive of equity markets.  

This week’s chart demonstrates how a massive USD 700bn has been wiped off the market cap of key Chinese internet stocks since their peak at start of the year. Investors are grappling with a crackdown by regulators in Beijing on Chinese internet companies, which has affected Tencent, Alibaba, Meituan, JD.com and many other leading tech companies. After Ant Group’s IPO was nixed by financial regulators in December 2020, Chinese authorities have ramped up pressure on tech companies – from internet companies to those offering private education, and most recently to ride-hailing.

Regulatory pressures in China have rattled investors, but the risks are more widespread. Big Tech is under scrutiny everywhere owing to its size, alleged anti-competitive practices, control of consumer data and much else. Higher levels of regulation on internet companies are a new investor reality globally – and if regulators act more decisively, it’s an issue that will come back to haunt investors.

Chinese consumers loosen purse strings

In a positive development for China’s recovery and policymakers in Beijing, the Q2 household savings rate dropped to 12.9% from 14%, marking the steepest fall since the recovery began and bringing the savings rate back in line with pre-pandemic levels. But China’s savings glut will not be solved by the normalisation of the savings rate alone. Households will need to reduce their accumulated savings for private consumption to continue supporting the recovery – and it remains too soon to say whether Chinese consumers are willing to loosen their purse strings entirely.

US housing market slowing, Fed sends 1st tapering signal, ECB guidance remains dovish 

The US housing market slowed in June with New Home Sales dropping to 676k from 724k, well below the consensus estimate of 800k. Mortgage applications appear to be stabilising, having dropped 30% between December and April. Demand appears to be reverting to pre-pandemic levels after last year’s dash to the suburbs. New home sales were 20% lower in June than in the same month in 2020. The supply of new homes reached 6.5 months worth (compared to 3.5 months last summer), indicating prices are likely to ease going forward. 

Elsewhere, US consumer confidence advanced to 129.1 in July, above the consensus of 123.9 and an increase on the upwardly revised 128.9 in June. Inflation expectations dipped 0.1% to 6.6%. Orders for cars, appliances and other durable goods increased 0.8% in June, but well below the 2.2% consensus. Supply chain issues continue to constrain production and shipping of durable goods, as businesses look to expand their depleted inventories.

At Wednesday’s hotly anticipated FOMC meeting, the Federal Reserve kept interest rates unchanged as expected but signaled a decision to taper bond purchases had moved closer. The Fed declared that “progress” had been made towards meeting its goals of full employment and 2% average inflation, suggesting tapering may start later this year or early next.

In Europe, the ECB revised its forward guidance to reflect its newly announced symmetric 2% inflation target. The ECB’s inflation stance is more dovish than previously, suggesting that interest rates will remain at current or lower levels for the foreseeable future and the ECB will maintain its loose monetary policy for the medium term.

  • Monday, 2nd August: UK, EU andChina’s Manufacturing PMI numbers for July
  • Thursday, 5th August: Bank of England’s Monetary Policy Committee makes a decision on interest rates and bond purchases
  • Friday, 6th August: US Bureau for Labor Statistics releases its July jobs market report

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