Through the roof: Q2 earnings season shattering expectations

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Julie Zhang, head of North America sales enablement and analytics, provided an update on second-quarter earnings season. They also discussed China's continuing crackdown on technology companies as well as key takeaways from the U.S. Federal Reserve (the Fed)'s recent meeting.

Exceptional Q2 earnings growth handily beats consensus forecasts

Second-quarter earnings season is shaping up to be one of the strongest in years, Eitelman said, noting that with roughly half of U.S. S&P 500® companies reporting results, earnings are up nearly 90% on a year-over-year basis. "Quite simply, earnings growth in the U.S. is through the roof right now," he remarked, noting that the growth rate so far is roughly 20 percentage points above what consensus expectations for the quarter were. Historically, that's four times greater than the typical difference between results and expectations, Eitelman said.

He noted that the exceptional growth in earnings is not just limited to the U.S., with European earnings currently tracking a growth rate of roughly 120%, per results from reporting STOXX® Europe 600 Index companies. "There's some really, really robust fundamental earnings growth around the world right now, and I believe that's helping push equity prices to all-time highs," Eitelman said, explaining that both the S&P 500® Index and the MSCI All Country World Index have flirted with records in recent days.

The remarkable earnings growth can probably be attributed to companies simply finding creative ways to do more with less in today's environment, Eitelman said, noting that the same theme was apparent in the recently released U.S. second-quarter GDP (gross domestic product) numbers. "The GDP report showed that the U.S. economy is now generating more activity than it was prior to the pandemic - and this activity is being generated with 7 million fewer workers," he stated.

Chinese markets sell off as regulatory crackdown intensifies

The Chinese government's clampdown on technology companies, which has intensified over the past several months, continued the week of 26 July, with regulators turning their attention to online-education platforms, Eitelman said. "China issued new rules basically saying that its entire education-technology industry is no longer allowed to earn a profit. In essence, the Chinese government is turning all online-education companies into non-profits," he explained.

News of the crackdown sent Chinese markets tumbling at the start of the week, Eitelman said, with a few individual securities dropping by as much as 70%. A couple days later, reports emerged that Chinese authorities were holding meetings with major investment banks to assuage their concerns, he remarked, suggesting that the government was doing a bit of damage control. He added that the People's Bank of China also responded to the market scare by injecting 30 billion yuan of liquidity into the financial system.

In Eitelman's opinion, China's crackdown on tech is likely to persist for some time, which could lead to additional bouts of volatility in markets. "The crackdown is creating an environment where it makes sense for investors to be more discerning about emerging-market exposures - and I believe that prudent active management may fit in well here," he concluded.

FOMC July meeting: Is the Fed one step closer to announcing tapering plans?

Switching to the Fed, Eitelman said that communications from the central bank after its 27-28 July meeting suggest that it's one step closer to a decision on when to begin tapering its asset-purchasing program. "Reading the tea leaves between the FOMC (Federal Open Market Committee) statement and Chair Jerome Powell's remarks at the follow-up press conference, it looks like the Fed expects it'll be able to assess how much progress has been made toward its goals of full employment and price stability at coming meetings," Eitelman explained. Currently, the Fed believes it has made some progress toward these goals - but not the substantial progress it has said would be necessary to begin tapering, he added.

Because the FOMC statement referred to coming meetings - and not just one meeting - Eitelman believes the Fed is more likely to announce its tapering plans toward the end of the year. The three remaining FOMC meetings in 2021 are in mid-September, early November and mid-December, he noted.