Two Data items today:
#1: An update on “the most important chart in the world”, at least when it comes to understanding why the S&P 500 keeps making new highs. It is FactSet’s graphical representation of Wall Street analysts’ aggregate S&P earnings forecasts for 2021 (bottom line) and 2022 (top line), shown here:
Three points here:
- Since the start of 2021, analysts have increased their 2021 S&P earnings estimates by 20 percent ($167/share to $201/share). These bumps have come around earnings seasons (when we see step-function increases in the graph’s lower line), which shows analysts have been in “show me” mode all year.
- Over the same timeframe analysts have also increased their 2022 estimates by 12 percent ($195/share to $219/share).
- While that $201/share number for 2021 may look like a leap of faith compared to 2019’s $163/share, it is still below what the S&P just reported in Q2 ($52/share annualizes to $208/share).
Zeroing in on that last point about how 2021 estimates look conservative, here is a FactSet chart which shows the current Wall Street earnings consensus for the next 5 quarters. The middle bar is Q2 2021’s $52/share, essentially an “actual” number since 91 percent of the index’s constituents have reported. See how the next four quarters’ estimates are all below Q2 ($49/share to $51.60/share)? That continues to seem overly pessimistic to us.
Takeaway: we have kept this issue of how the Street remains too low on 2021/2022 earnings expectations in front of you for many weeks now. It’s just as true today as it was before we saw Q2 earnings announcements. This is the cornerstone of our bullish view on US large cap equities. Would you sell a stock if you had a strong belief that earnings estimates were too low? Probably not. The same point goes for entire markets as well.
#2: How is Q3 2021 going? Here is a mid-quarter equity asset price performance update:
Global stock indices (dollar-based returns, Q3-to-date):
- MSCI All-World: +2.5 percent
- MSCI All-World ex-US: 0.0 pct
- S&P 500: +4.0 percent
- Russell 2000: -3.8 pct
- NASDAQ Comp: +2.2 pct
- MSCI EAFE (non-US developed economies): +3.2 percent
- MSCI Japan: +1.6 pct
- MSCI Europe: +4.4 pct
- MSCI Emerging Markets: -6.2 percent
- MSCI China: -13.6 pct
- MSCI Taiwan: -1.8 pct
- MSCI South Korea: -7.3 pct
Comment: the rapid drawdown in Chinese equities is the big story here at halftime in Q3 2021. This has not just dinged investor confidence in that country’s stocks, but in Emerging Markets as a whole. We continue to recommend an EM/China underweight, a position we’ve had for many months.
The other trend worth noting: US large caps continue to outperform both rest-of-world and domestic small caps. We recently upgraded the Russell to neutral from underweight and hold to that position today. Lastly, Europe is outperforming Japan and we still prefer the Continent’s equity markets as a non-US equity play. The S&P remains, however, our top global stock index investment idea.
US large cap sectors/Big Tech QTD (listed best to worst):
- Utilities: +8.6 percent
- Health Care: +6.1 pct
- Real Estate: +5.4 pct
- Financials: +5.2 pct
- Technology: +5.0 pct
- Materials: +5.0 pct
- Consumer Staples: +3.6 percent
- Communication Services: +2.7 pct
- Industrials: +2.5 pct
- Consumer Discretionary: +1.7 pct
- Energy: -8.3 pct
Big Tech QTD (listed best to worst, 22 percent of the S&P 500):
- Google: +10.4 percent
- Apple: +8.9 pct
- Microsoft: +8.1 pct
- Facebook: +4.4 pct
- Amazon: -4.2 pct
Comment #1: On the plus side, almost every US large cap sector is higher through the first half of Q3 2021. That speaks to the broad-based Q2 earnings leverage we saw as companies reported Q2 results. Only Energy (which we still like) is down, but given its +42.1 percent 1H 2021 performance that is understandable.
Comment #2: Q3-to-date’s outperformers are a thematic mishmash of defensive groups (Utilities, Health Care), cyclicals (Financials, Materials) and secular growth (Tech). No clear signal about market sentiment, therefore … We remain positive on Health Care, Tech, and cyclicals (Financials, Industrials, Energy).
Comment #3: US Big Tech, which we consider the S&P 500’s most important “sector”, has been an important driver of US large cap returns this quarter. Apple and Microsoft’s QTD gains, for example, represent a full point of the S&P 500’s 4.0 percent gain in Q3 2021. Without them, US large caps would be trailing European equities, for example.