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Stocks Are Doing Something They Haven’t Done Since The Dot Com Bubble

With 66 S&P 500 companies, representing 22% of S&P 500 earnings, having already reported Q4 earnings, there was some good, some not so good, and some downright bizarre news this earnings season.

First, the good news: as Bank of America’s Savita Subramanian reports, S&P EPS rose 2% last week to $38.70 (-8% YoY) and 73% of companies have beaten on both sales and EPS, tracking similar to last quarter when we ultimately saw a record number of beats. This means that as of this moment, 4Q earnings are clearing BofA’s – and the consensus – EPS estimate by over 2% (but ex-Financials, earnings are tracking just 1% above expectations at the start of January). Despite Financials’ beat and overall positive 2021 guide, which was largely due to billions in reserve releases, the sector has lagged with Growth & Tech driving the S&P 500’s 2% return last week according to BofA’s Subramanian who however repeats that the bank “sees signs of a last gasp Growth trade, and advise sticking with Value.”

In the not so good news category, BofA notes that while S&P 500 non-Financial net margins unexpectedly rose 10bps YoY to 11.3%,  – pointing to aggressive cost control implemented by companies – analysts expect a 70bps drop in net margins YoY to 10.2% in 4Q. Of the 10 sectors (ex-Fins), only Materials is expected to see higher margins YoY (+1.0ppt). Indeed, the bank’s own Corporate Misery Indicator, which has been strongly correlated with, and sometimes led, the profits cycle, also took a pause in 4Q, indicating sluggish earnings recovery in 4Q.

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