In the May issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he explains why we remain overweight equities and the significance of an expected market correction. He also reveals our expectations for the economic trajectory and the importance of staying invested and calm to help potentially reap rewards down the road.
  • In Focus by Research Analyst Evan Kurinsky and Senior Portfolio Manager Jordan Strauss, CFA, provides a detailed look at special purpose acquisition companies, or SPACs, and how they can provide a differentiated return stream, depending on your risk/reward objectives.
  • Investment positioning and domestic equities asset class overview.

Earnings season is a key time for market participants. Even for long-term investors like us, who are not in the practice of aggressively trading securities before or after earnings announcements, it is an informative few weeks. The microeconomy meets the macro, and companies either confirm or challenge what we’re seeing from other economic data. Direct commentary from management is critical, particularly at watershed moments in the business cycle.

Riding the rising tide

We have held an overweight to equities since November 2020 and continue to find the return vs. risk profile for stocks more compelling than bonds or other defensive assets. The U.S. economy is growing at the fastest rate in decades, with potential for economic growth and earnings that surprise to the upside. The magnitude of growth figures for 2020 makes it such that the margin of error—more likely increasing the upside—could be quite significant.

That thesis is playing out in the latest slew of macroeconomic data and corporate earnings reports. U.S. GDP for the first quarter of 2021 grew 6.4% quarter over quarter annualized, with real GDP staging a massive comeback since the second quarter of 2020 and now sitting just 1% below pre-pandemic levels on an annualized basis. (Figure 1). In addition, U.S. personal income grew by 21%—the most in the 75 years that data has been recorded.

S&P 500 earnings for 1Q 2021 are projected to grow a whopping 46% year over year, the highest rate of growth since the first quarter of 2010. And 2Q 2021 is expected to deliver growth of more than 58%. While earnings growth was certainly expected to be large given year over year comparisons to the 2020 pandemic lows in economic activity, 1Q 2021 earnings surprises—at 3.7% and 22.8% above estimates, respectively (according to Factset)—are either at or near record-high levels.

Some of the biggest earnings beats have been delivered by the market’s mega-cap growth darlings in tech, communication services, and internet retail. We believe these companies can continue to grow after the pandemic, as new business creation drives cloud adoption, tech investment and, to a material degree, permanent changes in consumer behavior. One of the most exciting areas of first-quarter GDP was business capital expenditures on equipment and intellectual property products, with growth in information-processing equipment and software of 26% and 10%, respectively, from pre-pandemic levels.

Despite this historic report card, the market response has been measured, with those U.S. large-cap stocks beating estimates and delivering price appreciation in line with historical averages (Figure 2). This may be an indication that equity valuations have priced in quite a bit of good news already, or it could be a sign that the direction of future policy—as it relates to the Federal Reserve or President Biden’s tax agenda—is giving investors pause. Nonetheless, the S&P 500 has climbed 11.8% year to date as of April 30. These strong gains could set up the market for a period of consolidation as more policy details come to light. Ultimately, though, we believe the strength of the underlying economy will propel further market gains despite the clear monetary and fiscal risks on the horizon.

Please see important disclosures at the end of the article.

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