EC Q2 Earnings Reports Confirm Economic Boom Ahead

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We are off to a great start in the Q2 earnings season, with the big banks coming out with a much stronger profitability picture relative to what they were able to show in the preceding periods.

This reconfirms our bullish earnings outlook that envisions estimates going up significantly over the coming months as the full extent of the economic rebound becomes clearer. While some brokers have recently tweaked their 2021 GDP growth forecasts for the U.S. a bit lower, the expectation is still for the U.S. economy to expand in the +6.5% to 7% range this year and north of +5% next year.

We typically associated growth rates in these ranges with emerging economies and not the mature U.S. market. We still remain confident that actual growth will surprise to the upside relative to current expectations, but these consensus projections nevertheless qualify as boom times ahead in our worldview.

Getting back to the Q2 earnings discussion, the sample of reports at this stage remains weighted towards the Finance sector, with the outsized numbers from the big banks seemingly distorting the aggregate picture for the 41 S&P 500 members that have reported already.

The Q2 reporting cycle accelerates meaningfully this week, with more than 250 companies on deck to report results, including 73 S&P 500 members. This week’s reporting docket is dominated by banks and brokers, but we do have number of bellwethers like Netflix (NFLX - Free Report), Johnson & Johnson (JNJ - Free Report), IBM (IBM - Free Report), Texas Instruments (TXN - Free Report) and others reporting as well.

The important takeaway from the big-bank results isn’t the huge bottom-line results that included significant reserve releases, but rather what these reserve releases and, even more importantly, management’s commentary about the state of the consumer and the economy tell us about the coming quarters.

In effect, these banks are saying, through these reserve releases, that they expect economic conditions in the coming quarters to be stronger relative to what they had originally modeled. This has a favorable read-through for all sectors, particularly the economically sensitive ones.

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