The earnings per share (EPS) for all S&P 500 companies combined increased to $189.96 this week. A gain of +1.3% for the week, and +19.5% year to date.
88% of S&P 500 companies have now reported Q1 results. 87.2% have beaten earnings estimates and results have come in +22.8% above expectations. (I/B/E/S data from Refinitiv)
2021 earnings growth is now +34% and rising.
The S&P 500 gained +1.23% for the week, another record high.
The EPS increased (+1.3%) slightly more than the index (+1.23%). The price to earnings (PE) ratio remains 22.3x.
The S&P 500 earnings yield is 4.5%, compared to the 10-year treasury rate (which declined to 1.57%), still heavily favors stocks in terms of valuation even at these record high prices. However, valuation isn’t a market timing tool. It’s just one piece of the puzzle.
Economic data review
The Institute of Supply Management (ISM) reported economic activity in the manufacturing sector grew for the 11 straight month. April results came in at 60.7, which was below last month (64.7), but still remains at historically high levels and well in expansion territory (reading above 50 signals expansion).
“The manufacturing economy continued expansion in April. Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”
All 18 manufacturing industries reported growth in April. New orders, Production, and Employment continue growing, while 80% of respondents reported having to pay higher prices for materials, pushing the prices index to a 12+ year high.
The ISM Services sector index for April came in at 62.7, slightly below March (63.7) but still well in expansion territory. 17 out 18 services industries reported growth in April.
“There was slowing growth in the services sector in April; however, the rate of expansion is still strong. Respondents’ comments indicate that pent-up demand is continuing. Production-capacity constraints, material shortages, weather and challenges in logistics and human resources continue to affect deliveries, which has resulted in a reduction of inventories.”
Much like the Manufacturing report, all services industries are reporting higher costs for materials and service related expenses. The “Prices” sub-index increased at a faster pace in April, and is now at the highest level since July 2008. Inflation pressures are here and its only a matter of time before it shows up in the core CPI. The real question is whether it will be transitory.
My weighted ISM (which combines services and manufacturing readings based upon their overall weight in todays economy) came to 62.2 for April. If annualized, it represents real GDP growth of approximately 4.78%.
Monthly net jobs created in April came in at +266K, which was well below consensus estimates of +990K. March was revised down from +916K to +770K, and February was revised up from +468K to +536K. Net revisions for February and March was -78K lower than previously reported.
The cumulative jobs recovery now stands at a net 8,214,000 jobs lost since the February 2020 high. Well off the -22,362,000 net jobs lost that bottomed out in April 2020, but still has only recovered about 63% of the total jobs lost.
Notable earnings
Mobile payments provider Square (NYSE:SQ) reported record results across the board. Adjusted EPS came in at $0.41, which was +141% above street expectations, and the fourth straight quarter where earnings surpassed expectations.
Total revenues came in at $5.05 billion, which was +51% above expectations, and a growth rate of 266% above Q1 2020 results.
Bitcoin revenues skew the results though. It’s basically a pass through item used to attract customers to the Cash App. Transaction based revenue grew 27%, subscription & services revenue grew 88%, hardware revenue grew 39%, while bitcoin revenue grew 1,047% and now makes up about 70% of Square’s total revenues. Excluding bitcoin revenues, Square’s revenue growth rate drops to +44%.
Gross profit margins on bitcoin revenues are only 2% – their profit is the spread between the buy and sell transactions. These results caused total gross profit margins to deteriorate from 37.7% in Q1 2020 to 19.1% in Q1 2021.
Operating income came in positive for the 3rd straight quarter – which is a company record – growing 85% from last quarter. Margins remained relatively similar from last quarter, at a modest 1.3%.
I’ll be the first to tell you its incredibly difficult to value a company like this. Very high growth but still hasn’t shown sustainable profitability. And now that bitcoin makes up 70% of the company’s revenues, valuation attempts become more difficult. I’ve owned a very small position for years, I think fintech is the future. The stock gained +250% last year alone, so a lot of good news is already priced in and I wouldn’t be surprised for this stock to consolidate those gains for awhile. I’d add to positions if price ever got into the $158-170 area, its a pretty good pure growth play, but I don’t have high conviction on this one long term.
Chart of the week
In light of this weeks disappointing jobs report, I thought it would be good to revisit the jobs recovery statistics from the prior recession. I know its a bad comparison, because these two recessions have completely different dynamics, but my point is that while the monthly net jobs gained/lost is an important data point, its seen as a lagging indicator.
The decline started in January 2008 and there would be 26 straight months of net job losses before bottoming out in February 2010. The S&P 500 bottomed out on March 2009, and would go on to basically double in value while net jobs lost continued for another 12 months. It would take 4 years to fully recover. Meanwhile the S&P 500 was already about 30% above the pre-crash highs, and more than tripled off the March 2009 lows.
It proves the point that if your waiting for the flowers to bloom and all the worries of the world to be solved, then your either going to miss out entirely or pay a premium price (buying high). It’s been one year since net jobs lost bottomed out, and we have recovered 63% of the losses. During the 2007-2014 recovery, it took roughly 2.5 years to get to that 63% recovery level.
One month doesn’t make a trend. I still expect strong jobs growth this year. And in this wacky environment we are in, bad news is technically good, since it means the Fed will probably remain accommodative for longer.
Summary:
It was an interesting week. Treasury Secretary Yellen’s comments were taken out of context, but I think the inflation concerns are valid. The prices index is soaring for both Manufacturing and Services PMI’s, and even Warren Buffett recently commented about the “very substantial inflation” he is seeing in the businesses Berkshire owns. Regular readers know I’ve mentioned the historic growth in M2 money supply numerous times before.
On Wednesday, we get our latest update on consumer price inflation (CPI), and it will be interesting to see how the market reacts when the core CPI breaks 2.0%. I have no idea if this month will be the month, but I expect it to breach 2% at some point this year.
The good news is the S&P 500 earnings yield (and 30%+ growth rate) is so good right now that rates have room to run before they even get close to threatening stocks in terms of valuation. All we can do is take it one week at a time and go as the data leads. Earnings are phenomenal, the economy is solid, and valuation is still reasonable.
This week we have 18 S&P 500 companies reporting earnings. For economic data we have the small business optimism report on Tuesday, CPI report on inflation on Wednesday, PPI on Thursday, retail sales and industrial production on Friday.