Evans Wealth Management Blog

With 88% of companies having reported, the earnings growth rate for firms composing the S&P 500 is 49.4%. This is double the estimate from March 31, 2021 of 23.8%. If the trend holds for the remaining 12% of firms who haven’t reported, it will mark the highest year-over-year growth rate since the first quarter of 2010. What makes this beat so impressive is analysts raised earnings expectations throughout the month of March. See the chart below for more details.

The four sectors contributing the most to the increase in earnings are the Financials, Information Technology, Communication Services and Consumer Discretionary segments. They represent 83% of the increase in earnings for the period.

This is great news for investors and represents further proof the economy is not just re-opening but doing so faster than expected.

After two rallies earlier in the quarter fizzled, the market found the energy to muster one more. The result was a record high for the S&P 500 ending just short of the 4,000 market. It was driven largely by investor optimism and some data points suggesting the economy is on track to reopen as expected. Below is a quick overview of what happened.

• Every S&P 500 sector participated in the rally with the Energy sector (30.8%) leading the way and the Consumer Staples sector (1.8%) struggling for traction.

• In general, what led the current year rally was the opposite of what led the rally last year. However, a rotation trade may have begun in the second half of March as Consumer Staples was one of the strongest performers during that period. Additionally, the Russell 2000 which has been rallying since Q4 of 2020 showed weakness in the second half of March as well as the S&P 500 Equalweighted index.

• Internationally, it was European ETFs leading the market higher for the quarter, followed by developed country indexes and then emerging market indexes. Canada posted some of the strongest international results. Notably, Brazil is struggling mightily with COVID-19 causing a drag on Latin American indexes.

• The rally in bond yields posed headwinds for fixed income securities. Short to intermediate duration bonds were impacted the least, while 20+ year Treasuries experienced double-digit declines.

• Recent March economic data suggests US manufacturing firms are blowing away forecasts for growth and the data is strong internationally as well.

The US market is in a good place as it enters the second quarter and there is reason for optimism as the economy reopens.

If anything in the above raises questions, feel free to reach out for further information.

COVID vaccines are being rolled out all over the country enabling us to resume normal life activities and a $1.9 trillion stimulus package was passed allocating funds to stimulate the economy. Could there be better news for investors? Yet, the stock market declined most of the first week of March. To explain the disconnect between the economic fundamentals and the recent market direction consider the accompanying chart.

The chart plots the market value of the 10 largest stocks compared to the total market value of all stocks. You can see there has been a considerable increase in their proportionate value over the last 5 years --- until recently.

The 10 largest stocks by market value benefited the most from the lockdown and work-from-home environment. As a result, their earnings grew and stock prices rallied more in 2020 than the broader market. It was good news for their investors, but it makes reporting a strong earnings growth gain for this year more difficult than usual. The potential for missing their earnings growth target is driving investors to take some profits from these and select other technology firm holdings. Hence the decline shown at the very end of the chart.

As investors raise cash from last year’s winners and transition into firms overlooked by investors in 2020, the market is trading somewhat erratically. This is likely a temporary phenomenon. Viewed from this perspective, the recent market action makes logical sense. In fact, a broader based rally signals a healthy economy and stock market. That’s great news for all investors.

During the Trump presidency, the US stock market outperformed all major world economies for the period. (See the above chart for details.) For a president with a campaign theme of America First, this feat is incredibly ironic. Maybe, it was more than just rhetoric??? You be the judge.

For all the noise about trade wars, it is interesting to note the bickering didn’t seem to hurt the US or Chinese economies.

Chart Source: Bespoke Investment Group

Prior to the coronavirus pandemic, many corporations viewed corporate debt markets a cheap source of capital. As a result, they loaded up their balance sheet with bonds in anticipation of higher rates in the future. When the virus cases escalated and decisions were made to lockdown the economy, many experts predicted wide-scale downgrading of bonds from investment grade to junk status (aka, fallen angels). Now that the worst of the virus cases are behind us, let’s take a look at the current state of the corporate bond market.

The accompanying chart shows several bond market metrics reflecting its health. To be fair, the number of downgrades to junk status clearly hit record volumes (see Fallen-angel debt tally chart). However, they appear to have fallen short of many experts’ expectations.

Many attribute the lack of downgrades to the Federal Reserve extending its corporate bond purchase programs to issuers losing their investment grade rating. This step, taken in April, helped open the funding markets to these troubled firms and kept them in business.

The other reason cited for the fewer downgrades is the amount of cash on hand. When the Fed cut interest rates to zero, firms traded shorter-term borrowings for longer-term debt and kept the proceeds as emergency cash to help them weather the pandemic. During an economic crisis, liquidity becomes paramount, so firms boosted their cash reserves to maintain solvency.

The above isn’t to suggest firms are totally free of future financial concerns, but their actions have certainly bought more time. Now we need the economic recovery to continue and life return to normal, so the hardest hit firms regain their footing before their cash runs out.