The earnings per share (EPS) for all S&P 500 companies combined increased to $189.96 this week, which is a gain of +1.3% for the week, and +19.5% year-to-date.

88% of S&P 500 companies have now reported Q1 results. 87.2% have beaten earnings estimates and results have come in +22.8% above expectations. 2021 earnings growth is now +34% and rising.

The S&P 500 gained +1.23% for the week; another record high.

The EPS increased (+1.3%) slightly more than the index (+1.23%). The price to earnings (PE) ratio remains at 22.3x.

The S&P 500 earnings yield is 4.5%, and when compared to the 10-Year Treasury rate (which declined to 1.57%), it still heavily favors stocks in terms of valuation even at these record high prices. However, valuation isn’t a market timing tool. It’s just one piece of the puzzle.

Economic Data Review

The Institute of Supply Management (ISM) reported economic activity in the manufacturing sector grew for the eleventh straight month. April results came in at 60.7, which was below last month (64.7), but this still remains at historically high levels and well in expansion territory (reading above 50 signals expansion). According to the report:

“The manufacturing economy continued expansion in April. Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials.

"Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

All 18 manufacturing industries reported growth in April. New orders, Production, and Employment continue growing, while 80% of respondents reported having to pay higher prices for materials, pushing the prices index to a 12+ year high.

The ISM Services sector index for April came in at 62.7, slightly below March (63.7), but still well in expansion territory. 17 out 18 services industries reported growth in April. According to the report:

“There was slowing growth in the services sector in April; however, the rate of expansion is still strong. Respondents’ comments indicate that pent-up demand is continuing. Production-capacity constraints, material shortages, weather, and challenges in logistics and human resources continue to affect deliveries, which has resulted in a reduction of inventories.”

Much like the Manufacturing report, all services industries are reporting higher costs for materials and service related expenses. The “Prices” sub-index increased at a faster pace in April, and is now at the highest level since July 2008. Inflation pressures are here and its only a matter of time before this shows up in the core CPI. The real question is whether it will be transitory.

My weighted ISM (which combines services and manufacturing readings based upon their overall weight in today's economy) came to 62.2 for April. If annualized, it represents real GDP growth of approximately 4.78%.

Monthly net jobs created in April came in at +266 thousand, which was well below consensus estimates of +990 thousand. March was revised down from +916 thousand to +770 thousand, and February was revised up from +468 thousand to +536 thousand. Net revisions for February and March was -78 thousand lower than previously reported.

The cumulative jobs recovery now stands at a net 8,214,000 jobs lost since the February 2020 high. This is well off the -22,362,000 net jobs lost that bottomed out in April 2020, but it still has only recovered about 63% of the total jobs lost.

Notable Earnings

Mobile payments provider Square Inc. (SQ) reported record results across the board. Adjusted EPS came in at $0.41, which was +141% above street expectations, and the fourth straight quarter where earnings surpassed expectations.

Total revenues came in at $5.05 billion, which was +51% above expectations, and a growth rate of 266% above Q1 2020 results.

Bitcoin (BITCOMP) revenues skew the results, though. It’s basically a pass-through item used to attract customers to the Cash App. Transaction based revenue grew 27%, subscription & services revenue grew 88%, hardware revenue grew 39%, while bitcoin revenue grew 1,047% and now makes up about 70% of Square’s total revenues. Excluding bitcoin revenues, Square’s revenue growth rate drops to +44%.

Gross profit margins on bitcoin revenues are only 2% – their profit is the spread between the buy and sell transactions. These results caused total gross profit margins to deteriorate from 37.7% in Q1 2020 to 19.1% in Q1 2021.

Operating income came in positive for the third straight quarter – which is a company record – growing 85% from last quarter. Margins remained relatively similar from last quarter, at a modest 1.3%.

I’ll be the first to tell you its incredibly difficult to value a company like this. It has very high growth, bu itt still hasn’t shown sustainable profitability. And now that bitcoin makes up 70% of the company’s revenues, valuation attempts become more difficult.

I’ve owned a very small position for years, I think fintech is the future. The stock gained +250% last year alone, so a lot of good news is already priced in and I wouldn’t be surprised for this stock to consolidate those gains for awhile. I’d add to positions if price ever got into the $158-170 area; its a pretty good pure growth play, but I don’t have high conviction on this one long-term.

Chart of the Week

In light of this week's disappointing jobs report, I thought it would be good to revisit the jobs recovery statistics from the prior recession. I know its a bad comparison because these two recessions have completely different dynamics, but my point is that while the monthly net jobs gained/lost is an important data point, it is seen as a lagging indicator.

The decline started in January 2008 and there would be 26 straight months of net job losses before bottoming out in February 2010. The S&P 500 bottomed out on March 2009, and would go on to basically double in value while net jobs lost continued for another 12 months. It would take four years to fully recover. Meanwhile the S&P 500 was already about 30% above the pre-crash highs, and more than tripled off the March 2009 lows.

It proves the point that if you are waiting for the flowers to bloom and all the worries of the world to be solved, then you are either going to miss out entirely or pay a premium price (buying high). It’s been one year since net jobs lost bottomed out, and we have recovered 63% of the losses. During the 2007-2014 recovery, it took roughly two and a half years to get to that 63% recovery level.

One month doesn’t make a trend. I still expect strong jobs growth this year. And in this wacky environment we are in, bad news is technically good, since it means the Fed will probably remain accommodative for longer.

Summary

It was an interesting week. Treasury Secretary Yellen’s comments were taken out of context, but I think the inflation concerns are valid. The prices index is soaring for both Manufacturing and Services PMI’s, and even Warren Buffett recently commented about the “very substantial inflation” he is seeing in the businesses Berkshire owns. Readers know I’ve mentioned the historic growth in M2 money supply numerous times before.

Next week we get our latest update on consumer price inflation (CPI), and it will be interesting to see how the market reacts when the core CPI breaks 2.0%. I have no idea if this month will be the month, but I expect it to breach 2% at some point this year.

The good news is that the S&P 500 earnings yield (and 30%+ growth rate) is so good right now that rates have room to run before they even get close to threatening stocks in terms of valuation. All we can do is take it one week at a time and go as the data leads. Earnings are phenomenal, the economy is solid, and valuation is still reasonable.

Next week we have 18 S&P 500 companies reporting earnings. For economic data, we have the small business optimism report on Tuesday, CPI report on inflation on Wednesday, PPI on Thursday, and Retail sales & industrial production on Friday.