An Earnings Season Like No Other

VT Tyndall North American Fund

An Earnings Season Like No Other

The second quarter earnings season is upon us once again and it is one for the history books. Never before have we seen so many companies beat Wall Street estimates by so much and across so many sectors. Many companies have delivered results that have been double or triple what analysts have been expecting and yet, you wouldn’t necessarily know it by the muted reactions of many of the stocks concerned.

There are some good reasons for this. We know that this quarter has the easiest comparisons we will probably ever see in our careers, as we lap Q2 2020, and some investors are concerned that the bounce back that many are seeing is one time in nature. Where do we go from here, what does the future really look like? This scepticism is borne out of confusion and mixed messages coming from the US Government’s response to Covid and the new variants.

Whilst America reopened much sooner than we have done in Europe there are some nuances; large swathes of the population are refusing vaccination and as Delta and other variants surface, some States are reimposing mask wearing. For many companies this has meant a semi reopening, a half-hearted return to normality. This can be best seen in the airline stocks, one of the best ways to play the reopening theme. The chart below shows the US Airline ETF which was up 100% from August 2020 until the recent high in mid-March, but corrected 25% to its recent low, despite the fact that domestic flights are full.

US Airlines ETF 1 Year Price Performance

Another anomaly is the that the vaccines that have been rolled out have not been approved by the FDA in the normal way. They were approved using the ‘Emergency Use’ designation which speeds up approval. However, because of this legal detail, employers cannot compel their employees to get vaccinated, meaning staff shortages are likely to continue as some workers will stay at home out of fear of Covid variants and unvaccinated co-workers.

Many companies have also been reporting inflation in raw costs and supply chain problems as big challenges in the quarter. This is perhaps no surprise and has been well flagged, but it is a very real-world problem that will take time to work through. Another issue has been freight costs; where for many manufacturers demand remains high, but supply of product is tight, as soon as they have product in stock they are shipping it out. This unplanned schedule means they have to use spot rates instead of contract rates, increasing costs significantly. These bottle necks, tight supply chains and inflated costs will abate at some point but are likely to be a problem for the rest of the year.

Despite the many puts and takes that this earnings season has delivered, we remain bullish on the outlook for US stocks. Innovation continues apace, consumers and corporates are in great shape and a further demand surge is likely as we see out the rest of the year as workers return and consumers start to spend again with confidence.

2nd August 2021
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Data source: Bloomberg
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