S&P 500 stocks rose more than 2% this past month with the help from a tremendous Q2 earnings season. The below two paragraphs drawn from recent FactSet commentary explain clearly why stocks have continued their historic run to all-time highs in July.
Positive Earnings Surprises Drive High Q2 Earnings Growth
Overall, 59% of the companies in the S&P 500 have reported actual results for Q2 2021 to date. Of these companies, 88% have reported actual EPS above estimates, which is above the five-year average of 75%. If 88% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 17.2% above estimates, which is also above the five-year average of 7.8%. If 17.2% is the final percentage for the quarter, it will mark the fourth-largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.
Positive Revenue Surprises Across Multiple Sectors
In terms of revenues, 88% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 65%. If 88% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive revenue surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting revenues that are 4.5% above the estimates, which is also above the five-year average of 1.2%. If 4.5% is the final percentage for the quarter, it will mark the largest revenue surprise percentage reported by the index since FactSet began tracking this metric in 2008.
The data indicates a very strong U.S. economy. Because of this, U.S. stocks continue to outperform foreign stocks and U.S. fixed income investments year to date. Well known tech giants have led the way.
The Fed remains steadfastly focused on easy monetary policy and continues to buy $120 billion of Treasury and MBS bonds per month.
The government in Washington, D.C. is close to passing a $1 trillion stimulus for infrastructure on a bipartisan basis. Democrats are positioning for an additional $3 trillion after the proposed bill passes.
Money is easy, stocks are rising, and bullish investment sentiment remains strong. Covid-19 cases are now rising at a concerning pace in unvaccinated areas of the U.S. and the world at large.
August and September are historically flat to down market months. The S&P 500 has risen for six months straight, and we are overdue for a selloff.
However, history has not been a great guide to market movements of late. Unprecedented times have called for historic market interference by central banks and legislatures to counteract the havoc that Covid-19 caused on the global economy. Companies have responded as well. Impressive human ingenuity, particularly in the U.S., has helped offset an economic decline.
Shutdowns have been followed by a rapid recovery and government fiscal and monetary policies have aided markets. Likewise, holders of tangible assets like commodities and real estate have benefited.
How long this can continue? No one knows. But participation in a bull market is essential for long-term investment growth.
As summer marches on we expect the money spigot to remain wide open. Keep in mind a classic stock market pullback, which often comes after a strong run, may be in the vicinity of negative 5%. This is not a forecast rather an observation.
At any rate, over the long run stocks rise in price but not in a straight line. Higher interest rates, strong inflation and higher taxes remain our top concerns.
Have a wonderful remainder of your summer!
Doug Coppola - Investment Committee Chairman
Steve Lindgren - Chief Investment Officer