Investors Shift Attention to Earnings: Market Commentary from Cabana’s CEO – April 19, 2021

8 months ago

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Over the past week, equity markets moved higher, and interest rates continued to moderate. First quarter earnings will now be a large focus for investors in the next days and weeks. Banks kicked things off last Wednesday and reported big numbers. Goldman Sachs, JPMorgan Chase and Wells Fargo all beat estimates. As mentioned previously, FactSet is projecting earnings growth of 24.5% overall for Q1 2021. If that comes to pass it would be the best quarter for earnings since Q3 of 2018.

Let us remember a few key concepts here. The first is that earnings growth is a big part of what drives equity prices, and indirectly drives allocation of capital to everything else. Simply put, earnings growth is key to the foundation of the all-consuming desire to chase return relative to risk. The second thing to remember is that equity markets (and bond markets) are forward looking. The earnings we are seeing now were previewed way back in the fall of last year. At that time, we saw outperformance of the equal weight S&P 500 compared to the market cap weighted index, rising bond yields, and the later rotation out of technology into other sectors of the economy. These were all clues that we looked for and discussed six months ago. (Some examples of this can be found in our commentaries from August 31, October 5 and November 23.) The change in political administration, and the prospect of additional stimulus was just icing on the cake. All of these things and more (like a Covid vaccine) resulted in the huge rally in stock and bond yields that started on November 1, 2020. Looking back six months, this new bull market seems obvious. It was all right in front of us. 

So, with this refresher in mind, the question becomes, how much of this rally is already priced into the cake? It’s funny how that one question is always the question. It is the question whether markets are moving up or down. It is what makes investing an art as well as a science.

Right now, signs point to a growing cake and the possibility of more earnings growth ahead. There is no sure thing in this world, and anything is possible, but for today, equity prices appear poised to move higher. It surely will not be a straight line up – it never is. There will be pullbacks and roadblocks along the way. Fear not, as that is how it works… and work it is.

Disclaimers

February 23, 2021

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

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The COVID-19 health epidemic has had substantial global economic impact on financial markets. As of March of 2020, restrictions to travel and business spanning the economy for activities not deemed essential have been imposed throughout the United States. These restrictions have caused unprecedented volatility and uncertainty in capital markets and have negatively impacted the economy. It is unknown how severe the impact to the economy and capital markets will be if the epidemic persists for an extended period of time. The epidemic may have a material adverse impact on Cabana’s investment advisory business including, but not limited to, the performance of our portfolio strategies.  

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