Three “Data” items today:
#1: Wall Street analysts are starting to reduce their Q4 2021 S&P 500 corporate earnings estimates:
- On November 12th, the Street was at $51.00/share for Q4 S&P earnings.
- On November 19th, that estimate rose to $51.09/share (+0.2 percent).
- FactSet (the source of this data, link below) did not publish an update during the week of Thanksgiving.
- Last week, however, FactSet’s analysis shows that the Street has cut their Q4 estimate to $51.04/share.
If you’re thinking we’re making too much of a fuss about just a few pennies, just remember what happened in September. As the FactSet chart of 2021 and 2022 S&P 500 earnings estimates below shows, when the Street started to take numbers in September down US equities had a rough month (-4.8 percent that month). Once Q3 earnings reports started to come in ahead of expectations, the index promptly resumed its rally.
Takeaway: US stocks have rallied all year because earnings have exceeded expectations, so the minute the Street collectively wavers on current quarter earnings power the market runs into trouble. That is happening again right now and supports our thesis that December will be an uncharacteristically volatile end to the year. Given virus variant uncertainties around the world, we expect analysts to cut numbers between now and the end of the year.
#2: The prior point raises the question of whether the Street has it right about Q4 and is correct in cutting their estimates; we believe the answer is a resounding “No”.
First, the Street’s Q4 estimate of $51.04/share is 5.0 percent BELOW actual Q3 results of $53.86/share. We’ve seen analysts be cautious all year, so this is part of a larger pattern. Specifically:
- Keying off the prior point about Q3 earnings, analysts spent all of September wringing their hands and cutting their numbers.
- On October 1st, their aggregate earnings estimate for the S&P 500 was $48.89/share, 7.4 percent less than Q2’s actual $52.80/share.
- Q3 results came in at that $53.86/share we just mentioned, 10.2 percent better than expected.
Second, Q3 US GDP growth was pretty anemic (+2.1 percent) and we still saw the S&P 500 resoundingly beat estimates; Q4 GDP is running much hotter according to both the Atlanta Fed’s GDPNow model and Blue Chip economists. The latest on these estimates (link below):
- The most recent GDPNow estimate is looking for +9.7 percent real Q4 GDP growth, the highest number out of this model since the start of the quarter.
- The Blue Chip consensus is running just over 5 percent real GDP growth for Q4 and has been trending higher since the start of November.
Takeaway: heartening as this point is, it is not enough to say one can wade into the currently volatile US equity market and buy indiscriminately. We had exactly the same message back in September during the last round of estimate cuts: understand that there is very likely good news on the way in the form of strong corporate earnings, but those will hit the tape next month. Not now, and not in the next 3 weeks.
#3: Three thoughts on Friday’s Employment Situation report, which most commentators found odd because job growth was below expectations (+210,000 actual, +500,000 expected) but unemployment still fell (4.6 pct October, 4.2 pct November).
- We think it very likely that Chair Powell knew the rough contours of this report when he testified in front of Congress last week and said the Federal Reserve would be looking to taper its bond purchases. Inflation is driving marginal changes to the Fed’s thinking on policy now. The US labor market is fine, or at least “fine enough” to tighten.
- Average hourly earnings for all US workers grew by an annual rate of +4.8 percent, but that only matched October’s rate. Hourly wages for non-supervisory workers were up +4.9 percent from last year, but again what was basically the same as October (+5.0 pct). Wages, in other words, are both proving stickier than one might think in the current labor-short environment and are also not matching inflation (last CPI reading +6.2 pct).
- As we come up to the 2-year anniversary of the US labor market peak (152.5 million, February 2020), it’s important to remember that the American economy adds (conservatively) 750,000 workers a year due to population growth. Therefore, at 148.6 million jobs (as of November 2021), we’re not short 3.9 million positions (152.5 million minus that number). We’re short 3.9 million plus 1.5 million, or 5.4 million positions.
Takeaway: to our thinking, the most notable feature of Friday’s US Jobs Report was that wages are not keeping up with inflation, another reason the Fed is feeling the pressure to accelerate a shift to tighter monetary policy.
FactSet Earnings Insight Report: https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_120221.pdf
Atlanta Fed GDPNow: https://www.atlantafed.org/cqer/research/gdpnow?panel=4