US earnings season has been a blast. Companies have been smashing it out of the park on profitability and growth as they put the pandemic behind them. However, share prices have barely moved. Why are investors stubbornly unimpressed?
- Two-thirds of companies have beaten market expectations and the average earnings per share growth is 63%
- Economic data is strong, with retail sales up 9.8% in March
- A lot of this strength is in the price. with the S&P 500 up 45% over the last 12 months
Results are still coming in, but there has been much to cheer in the latest round of US earnings. Analysis from Barclays suggests that around two-thirds of companies are beating market expectations and the average earnings per share growth is a punchy 63%. But even where growth has been impressive, investors have responded with a shrug.
This apathy certainly isn’t because of a deteriorating economic picture. The vaccine rollout continues at pace and US economic data has been reliably buoyant. Retail sales were up 9.8% in March; manufacturing figures are encouraging and that’s before the latest round of stimulus hits.
The first problem is that a lot of this strength is in the price. The US stock market has been on a tear for much of the past 12 months, rising 45%. It is now well above its pre-pandemic highs and has already anticipated much of this earnings recovery. It looks expensive on most measures.
There are also some headwinds. Corporate tax rises appear an inevitability. While the headline corporate tax rate may end up closer to 25% than President Biden’s preferred 28%, there are a number of other corporate taxes likely to rise at the same time that don’t appear to be factored into markets.
The other problem is inflation. If there has been a theme for this earnings season it is price rises, with many companies reporting higher input prices and suggesting that they will have to raise their prices as a result. The Federal Reserve continues to see this as a short-term phenomenon, a result of pandemic-related bottlenecks and economic recovery. However, if it proves more entrenched, it may reconsider its position. Any hint that interest rates could rise will be taken very badly by markets.
While no-one would write-off the US market, it may be that its time in the sun is over for the time being. It has led global stock markets for longer than almost anyone expected. Today, it looks expensive relative to its history and its peers and is facing some notable headwinds. There will still be opportunities, but gains may be harder-won.