As of May 14th, 91% of the S&P 500 have reported earnings (440 companies). The first quarter of 2021 saw S&P 500 earnings at $48.21, besting Wall Street expectations by 21% – this is the biggest beat in recent memory. Not only that, but Investors have seen earnings grow +57% YoY and +23% from its Pre-COVID high in 2019. H/t egregious fiscal spending.
A common theme on the earnings calls were that earnings visibility is substantially improving, with the number of guidance instances in April hitting the highest level for April since 2015, with nearly 3x more guidance instances YoY. Moreover, we have witnessed corporate sentiment and business conditions continue to reach new record levels.
We would argue that inflation is the biggest topic this earnings season. Mentions of “inflation” have jumped nearly 800% YoY. The number of mentions has historically led CPI by a quarter with 57% correlation and points to higher inflation ahead. At a sector level, “inflation” was most prevalent in Materials, Consumers and Industrials companies.
Despite the strong beats, we believe investors were largely unenthused, similar to last quarter when we saw negative alpha for beats for the first time since the Tech Bubble. So far, companies that beat on both sales & EPS have outperformed the S&P 500 by just 41bp the next day, well below the historical average of +151bp, indicating that the bar is high.
Overall, we are very happy with how our HNW holdings executed during the quarter. Keeping with the inflation theme, we believe that our compounder mentality should really bode well for companies trying to navigate the inflationary environment, as many of these companies have pricing power and inelasticity amongst the services that they provide. Thus, able to pass on a lot of the cost-push inflation to its customers.
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