Three “Data” items today:
#1: An update on the “most important chart for US equity investors”: Wall Street analysts’ earnings estimates for the S&P 500 in 2021 (bottom line) and 2022 (top line). After 2 months of relative stagnancy, estimates have started to increase again and are now at record levels ($203/share for 2021, $221/share for 2022). As we outlined last week, Street analysts have only significantly raised their numbers during earnings seasons (hence the stair-step pattern). Now that Q3 earnings season is coming in strong, they are once again lifting their expectations.
How much higher can these estimates go? Two thoughts:
- Assuming Q3 and Q4 S&P earnings match Q2’s $53/share, the S&P 500 will post 2021 earnings of $208/share. That is 2.5 percent higher than the Street’s $203/share estimate. We feel this is a reasonable baseline because Q3 results thus far are running at least as strong as Q2 numbers. There could be some modest upside to Q4 against our $53/share estimate, but we’ll err on the conservative side for now.
- Our $53/share estimate of quarterly current earnings power equates to a $212/share, and since analysts tend to make 10 percent earnings growth their standard guess at the start of a year, this means their 2022 estimates should go to $233/share. That is 5 percent above the Street’s current $221/share earnings estimate for the S&P 500.
Takeaway: the Street’s estimates for S&P 500 earnings remain at least 3 percent low for 2021 and 5 percent low for 2022. As more companies report their Q3 results, analysts will continue to increase their forward estimates. No, they won’t be lifting them as much as in prior quarters; analysts are getting closer to the “right” numbers after a year of consistently being too pessimistic. Still, outside of a sudden rate shock (which we’re simply not seeing at present), it is hard to see US equities faltering as long as estimates keep heading higher.
#2: There has been a remarkable shift in sentiment about US corporate tax rates on the PredictIt small-money wagering website in the last 3-4 days. The chart below tells the story. The line shows the odds for rates staying at 21 percent (the current rate) or lower. Over the last 3 months this widely followed prediction market has put +50 percent odds on US corporate tax rates going up for 2022. Last Thursday, however, the odds that they would stay the same shot higher, to 80 percent. As of Sunday afternoon, they were still 79 percent.
Takeaway: this is a major reset of expectations in a market that investors watch to handicap the probability of important political events. The threat of higher corporate taxes has been a lingering overhang on US equities. PredictIt users have repriced that risk much lower, for now anyways.
3: US state and city unemployment rates for September were out on Friday and continue to show sizeable disparities in regional labor markets:
- 28 states show unemployment rates below the national level of 4.8 percent.
- 19 are below 4 percent, or what many economists would call full employment. Nebraska anchors the low end at 2.0 pct, and Arkansas, Indiana and Iowa are all at 4.0 percent. Georgia is in this grouping as well, at 3.2 percent as are Minnesota (3.7 pct) and Virginia (3.8 pct)
- 11 states are running +4.0 – 5.0 percent unemployment. These include the Carolinas (North: 4.2 pct, South: 4.1 pct), Tennessee (4.4 pct), Michigan (4.6 pct) and Florida (4.9 pct).
- The problem areas are still on the coasts. East coast: New York (7.1 pct), New Jersey (7.1 pct), Connecticut (6.8 pct), DC (6.5 pct), and Pennsylvania (6.2 pct). West coast (and adjacent): California (7.5 pct), Nevada (7.5 pct), New Mexico (6.9 pct) and Hawaii (6.6 pct). Illinois is also high, at 6.8 pct unemployment.
Urban unemployment is largely to blame for the largest US states’ still-high joblessness:
- New York City: 8.9 pct
- Los Angeles: 8.2 pct
- Chicago: 6.1 pct (higher than national level, but lower than Illinois)
Takeaway: recall that September’s level of US job creation was lower than expected at just 194,000 positions versus expectations of 500,000, a fact which is much less surprising when you see the American labor market through the lens of local economies. States with large cities as their economic fulcrum continue to struggle. “Work from home” means less urban employment in the myriad of roles tied to large volumes of office workers. Less business travel to conventions, conferences and client/prospect meetings in urban areas goes to the same issue. As a result, we continue to believe US job growth will be lower than commonly expected.
FactSet Earnings Insight report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_102221.pdf
PredictIt US Corporate Tax Rate contract: https://www.predictit.org/markets/detail/7237/What-will-be-the-corporate-tax-rate-for-2022
State Level Unemployment data: https://www.bls.gov/web/laus/laumstrk.htm