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Perspectives

The market trades on earnings

by Fortem Financial July 12, 2021

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.
Source: Strategas


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.

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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