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Q1 US Reporting Season review

US Reporting Season has almost come to an end for the US stock market, with the S&P500 smashing expectations for the quarter.

The data that matters:

EPS Growth (YoY) Revenue Growth (YoY) And of positive suprises Price Reaction (%) Current P/E
43.9% 9.9% 87% 0.06% 29.50

Source: Bloomberg Intelligence

What were the key takeaways from the reporting period?

Earnings smash estimates, positive surprises historically high

It was a resoundingly positive earnings period for S&P 500 companies. Earnings per share (EPS) smashed expectations, posting 43.9% growth for the quarter, against expectations of 23.9% growth coming into the reporting period. The upside in earnings was captured in the percentage of companies exceeding analyst estimates for the quarter, with 87% delivering positive earnings surprises – well above the roughly 71% average of the past decade.

It proved the strongest quarter of year-over-year EPS growth for the S&P 500 since 2010, in what was a clear signal of the unfolding recovery in the US economy from the Covid-19 recession.

You can trade the US500 with IG by creating a trading account or log into your existing account to get started.

Market prices respond neutrally to earnings, S&P500 ends reporting period flat

Despite the very strong outcome to Q1 earnings season, the reaction to better than expected profits amongst S&P500 companies was relatively limited. The average price reaction to company results on the day of earnings was 0.06% – above the previous quarter, which saw a negative price-reaction, but well below the average 0.80% positive reaction typical of the S&P500 over the course of the past four years.

The S&P500 also finished the reporting period little different from where it began, adding only a very modest 0.08% between the 15th of April to the 15th of May, probably in part due to a slowing down of the earnings upgrade cycle evident during the quarter.

Financials, materials and consumer discretionary stocks lead the market

The sectoral gains for the S&P500 in the first quarter were primarily cyclical – or 'value' – stocks, and the 1Q reporting period provided justification for this strength. Financials, materials and consumer discretionary stocks topped the market for EPS growth, in what was a sign of the strengthening underlying fundamentals of the US economy. Financials was the best performing sector over all, delivering EPS growth of 132%, driven by a fall in loan provisions, higher global interest rates, and continued strength in trading revenues. Consumer discretionary wasn’t far behind with EPS growth of 122%, aided by the impacts of higher consumer spending enabled by US fiscal stimulus measures.

Corporates highlight growing inflationary pressures in the future

A macro-risk constraining the US stock market recently has been that of inflation. It became a theme amongst S&P500 corporates during earnings season, with the management of 175 constituent companies of the index mention inflation on their earnings calls, according to data-company Fact Set. Despite the risk of rising cost pressures, profit margins are forecast to remain robust across the market going forward, with the average margin for an S&P500 company still floating near 12%. The commentary still rattled market participants, however, who see it as evidence that the US Federal Reserve may need to tighten monetary policy sooner than currently being guided.

S&P500 higher than before reporting period, but upside momentum is slowing

What was remarkable about this earnings period was the markets’ clear indifference to what was a whopping result. Despite the highest EPS growth of the last 10 years, and a well above average 87% of companies delivering positive earnings surprises, the S&P500 finished the reporting period little changed to where it started it. The cause behind this appears to be partly macro, partly technical in nature. Fears of higher inflation and US Federal Reserve policy tightening plagued the reporting period, while lower volatility and diminished upside momentum, caused and compounded by diminished trading activity amongst the retail class of trader, weighed on the S&P500.

While still close to its record highs, there are fears that historically elevated valuations at a time where the earnings upgrade cycle is slowing and monetary tapering fears are mounting could curb further gains for the index. A push above previous record highs would validate the view the bull market still has ample legs, while a sustained plunge below the 50-day moving average – the level which seems to be where traders wish to buy-the-dip on sell-offs – would indicate a looming bearishness and further weakness for US equities.

You can trade the US500 with IG by creating a trading account or log into your existing account to get started.

Source: Trading View, IG

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