Earnings for the S&P 500 are poised to be up more than 60% y/y when the second-quarter earnings season kicks off this week. This will be the second greatest increase in earnings growth since the fourth quarter of 2009, when profits rose +108.9%. While there are a number of heavy cyclical companies that will post significant earnings gains versus the pre-pandemic levels established in 2019, those companies hardest hit from the pandemic lockdowns - like air travel, leisure, and entertainment – will have to wait until 2022 to reach their prior high-water marks. We believe some caution is warranted in the Consumer Discretionary and Industrials reopening trade is warranted to the extent to which the policy mix is unlikely to become any more supportive and fiscal and regulatory tightening could be a greater risk to the overall economy in 2022. To be clear, we believe the chances of a recession in 2022 are quite low (say 15%) given the magnitude of consumer savings, the existence of more than 9 million unfilled jobs in the U.S. economy, and the hesitance of the Fed to tighten monetary policy any time soon. Still, gains for the economy – and for the market – are likely going to be harder to achieve in the second year off the bottom than they were in the first. Stickier-than-expected inflation may make it more difficult for the Fed to continue to ignore one part of its dual mandate (price stability) in favor of the other (full employment).
Market Expected First Rate Hike In 4Q Of 2022
As client questions continue to remain focused on potential rate hikes, we thought providing an update on where the implied yields from the Fed Funds futures stand. As we have previously mentioned, the fed fund futures still indicate that markets expect the first rate hike in October of 2022, with two additional hikes in 2023.
Reminder: Historically, The First Rate Hike Is Not Detrimental
It is important to remember that the first-rate hike has not historically been detrimental for equity markets. On average, the S&P 500 is up 6.6% in the six months following the first rate hike based on the eight prior rate hiking cycles. Thus, while it is more muted than the returns we have seen in the last year, it is still a respectable overall return.
Bond Investors Not Getting Paid For the Risks They Are Taking
Thanks to record low-interest rates and spreads, the amount of yield bond investors are earning for each unit of duration has fallen to the lowest level in the last three decades. Thus, while many bond funds are actively managed, it’s important to know that it would not take much of a move in yields to wipe out the income return on the index or a fund tracking it.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
Bank profits are poised to surge as the pandemic recedes.
The country's biggest banks will report their quarterly earnings this week, reaping the benefits of an economy that's returning to normal.
New York Times
Jul 12, 2021
Ron Insana: The bond market agrees with the Federal Reser...
Falling yields, including the 10-year Treasury's sharp decline, suggest the bond market believes inflation won't stick around.
Jul 11, 2021
Earnings Kick Off With Sky-High Forecasts, Record Stock M...
Observers will be watching to see whether companies trounce Wall Street's expectations and, with stock valuations sitting above long-term norms, seeking clues on what the future holds for...
Wall Street Journal
Jul 11, 2021