Ahead Of 1Q21 Earnings, Investor Sentiment Lopsidedly Bullish – Unwinding Now Or In A Couple Of Weeks?

This week begins the 1Q21 earnings season. The S&P 500 rallied to a new high last Friday. Sentiment remains elevated. Unwinding is just a matter of time – whether it begins now or in a couple of weeks.

The 1Q21 earnings season begins in earnest this week. Customarily, banks and brokers will do the honors. JP Morgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) will report on Wednesday, Citigroup (C) and Bank of America (BAC) on Thursday, and Morgan Stanley (MS) on Friday. 

Ahead of this, S&P 500 companies are expected to earn $39.31 in operating earnings in the quarter. This was as of last Thursday. Estimates have steadily gone up this year, with the sell-side expecting $37.04 at the end of last year (arrow in Chart 1).

The revision trend progressively improved throughout the quarter, although estimates were as high as $44.78 in January last year. Back then, these analysts were expecting $194.23 for the whole year. Then Covid-19 hit and the bottom fell out. By mid-July, this year’s estimates dropped to $160.89, before gradually rising to the latest $173.71.

As the aforementioned companies get ready to report this week, XLF (SPDR Financial Sector ETF) posted a new closing high last Friday, as did both the S&P 500 large cap index and the Dow Industrials.

Investor sentiment is beginning to get euphoric.

In the week to last Tuesday, Investors Intelligence bulls jumped 6.4 percentage points week-over-week to 60.8 percent – the first 60+ reading in 10 weeks. In the week to Wednesday, the NAAIM (National Association of Active Investment Managers) Exposure Index shot up 37.8 points w/w to 89.9 – a seven-week high. And in the week to Thursday, AAII (American Association of Individual Investors) bulls climbed 11.1 percentage points w/w to 56.9 percent, which was the highest reading since January 2018. The three respectively measure sentiment among money managers, newsletter writers and retail.

In Chart 2, an arithmetic mean is calculated of the three readings. Last week’s total was 69.2, which is very high. Of course, in November-December last year, the reading persistently remained in the low-70s for five weeks straight. That was the time when the US presidential election had just ended and Pfizer (PFE) had just announced its positive vaccine news, followed by Moderna’s (MRNA) similar announcement a week after that.

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