We are now about halfway through second quarter “earnings season” when companies with stocks listed on U.S. exchanges report their quarterly revenue and profit results for the period between April and June. To put a not so fine point on it, the quarter has been nothing short of spectacular.
According to investment research firm Fact Set, with just over half of companies reporting results thus far, 88% of companies included in the S&P 500 index have reported profits and sales that have exceeded expectations. Going into the mid-point of the quarter, the average growth rate for profits was 85% over the 2nd quarter of 2020.
Admittedly, I do find the growth rate metrics over this time last year as less than useful, as we can all remember that during the second quarter of 2020 the economy was shutting down rapidly due to COVID lockdowns, but 85% is still a huge average growth rate number and it’s the highest rate of growth since the first recovery quarter since the 2008-2009 recovery following the financial crisis.
In addition to these positive corporate results, the government also reported last week the overall U.S. economy grew at a 6.5% rate in the second quarter, and economic activity, in general, has now exceeded the pre-COVID peak in late 2019.
These eye-popping numbers have many market pundits fostering the concept of “peak everything,” which implies that all the tailwinds for the economy and markets have peaked, with deceleration being the most likely path going forward. The notion furthers that this deceleration will dissatisfy investors and subdue markets going into the fall.
Like so much in the post-pandemic world, I find the concept of peak everything also shrouded in what I would call COVID fog. The pandemic as well as the government and social response to it, has been so unprecedented even the recovery period is opaque and difficult to understand.
Yes, these economic growth metrics are hard to grasp, and I doubt any investors actually expect these types of results going forward, but markets, in general, tend to have a short memory and “show me” mentality. Two quarters from now, earnings are likely to decelerate and GDP growth as well, will this cause stocks to lose their luster?
As with most things market-related, the answer has to be “it depends.” Emerging from COVID looks to me like a public and economic policy minefield. Eventually, the Federal Reserve will need to pull back on its “peak” monetary policy support, eventually, kids across the nation will be back in school and parents back to jobs, eventually, the enhanced unemployment benefits will end, and eventually, the CDC dictated rent holiday will be over. Eventually, offices will reopen, and eventually, public health will return to its traditional role as a background type of concern. The question is, then what?
Well, if the “then what” is the economy of December 2019 comes back and picks up where it left off, then that’s not too bad. If the “then what” is companies and workers have found new ways of using technology to be more efficient, and with employees back to the office they are now able to serve customers even better than before December 2019, that’s pretty good. If the “then what” means some of the wage increases gained on the lower end of the wage scale prove to be sticky, and wages for these workers rise without government intervention, well that’s really good.
With these types of tailwinds, perhaps the peak can still be ahead. Let’s hope eventually doesn’t become too long away.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
