As expected at MB Fund, the new US profits boom is nothing short of extraordinary, tearing the roof already inflated expectations, via BofA:
Corporate America delivers again; tracking an 18% beat
So far, 303 S&P 500 companies comprising 78% of earnings have reported, and 1Q EPS is now tracking at an 18% beat, exceeding last quarter’s 15% beat. 1QEPS of $46.80 suggests +41% YoY and +20% vs. pre-COVID 1Q19. Cons. Disc., Financials andComm. Svcs. drove the beat, all beating by more than 30%. The proportion of beats is also robust, with 68% beating on both sales & EPS, well above the historical avg. of43%.
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High bar for expectations, limited alpha
Despite the strong beat, investors were unenthused, like last quarter during which we saw negative alpha for beats, not seen since the Tech Bubble. Companies beating on sales/EPS in 1Q have led by just 16bps the next day, vs. average +1%.
Inflation trends running hot as margins hit record highs
We noted during Week 2, that mentions of “inflation” quadrupled YoY; after last week, mentions have jumped nearly 800% YoY (Exhibit 10). On an absolute basis, mentions skyrocketed to near record highs from 2011, pointing to at the very least,“transitory” hyper-inflation ahead. Inflation risk was most prevalent in Materials, Consumer sectors and Industrials (Exhibit 13). By category, mentions of pricing (+36%) and transportation(+35%) rose most, followed by materials (+28%);labor-related mentions rose least(+9%). Despite rising inflation concerns, net margins ex-Financials jumped to record highs, implying manageable inflation thus far.
Corporate guidance is back!
We saw the highest number of guidance instances for April since 2015, with nearly 3xmore guidance instances YoY, indicating improved visibility. Guidance remained robust: our 1-month guidance ratio(# of above-vs. below-consensus guidance instances)jumped to 4.7x in April, representing the second strongest level in record, just behind 4.8x in October 2020, pointing to continued momentum in corporate earnings.
A few points:
- The inflation is temporary. Notice the key sectors of materials, transport and industrials. These will all deflate together as supply-side bottlenecks are resolved.
- Notice as well that the last time we saw this was 2011, just before China crashed inflation worldwide by tightening. Same today!
- That will leave US firms with still strong fiscally-led demand and widening margins!
The profits boom may be near the peak in the second derivative but it has plenty of gas left in it. The return of guidance is another confirmation.
This is going to put a big dent into high valuations.