EC Previewing The Q1 2021 Earnings Season

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It’s been a year now since the Covid-19 pandemic took over our lives. Thankfully for all of us, there is a lot more clarity ahead, with the vaccination efforts enabling us to put the worst of the pandemic behind us in the coming months. This optimism about the days ahead is showing up in a brighter economic outlook, with estimates of GDP growth reaching levels not seen in a very long time.

All of this has a direct bearing on the two factors that drive stock prices in the long run – corporate earnings and interest rates. Our focus in this note is on the evolving earnings picture as we look ahead to the March-quarter earnings season that will take the spotlight in the coming days, but a brief comment on the interest rate picture is in order here.

Parts of the market appear to be really worried about the recent jump in treasury yields, prompting a pullback in high-growth stocks and rotations into more cyclically levered parts of the market like banks, energy, industrials, and others. The recent enactment of the new Covid relief measure has added to inflationary worries that are seen as causing the rise in interest rates.

This is a reasonable conversation ahead of a period of accelerating economic growth in a post-Covid world. But we should view the rising treasury yields as reflective of a favorable growth backdrop that will be reflationary but not necessarily inflationary of the runaway type that will prove disruptive to the outlook.

In other words, I am not worried about rising yields as I see them as reflective of the improving macro backdrop, which should be greatly beneficial to companies operating in the economically sensitive parts of the economy. And while this means that the going will be relatively tougher for the more speculative type of Tech stocks, the more traditional large-cap Tech stocks should remain as profitable and dominant as they were before.

Earnings Expectations

Regular readers of our earnings commentary know that we started seeing a positive shift in the overall earnings picture in July last year. This improving trend in estimate revisions remained in place over the following months and appears to have accelerated over the last few months, as the chart below showing evolution of 2021 Q1 earnings growth estimates shows.

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William K. 1 month ago Member's comment

Interesting, but consider that a CEO who did not predict a growth in earnings would be out on the street before lunch. The fact that there are earnings, as opposed to losses, should be enough. So I detect the stink of greed, and probably a detachment from reality.

Mary Connors 1 month ago Member's comment

Yes, greed!