The following represents the opinions of Innealta Capital and are subject to change at any point.
Most of Q2Y2021 U.S. earnings have been reported, and the results were very strong. U.S. corporate sales and earnings growth exceeded analyst expectations and showed an 85.1% and 23.1% year-over-year growth, respectively [1]. If the earnings growth rate holds through the remaining Q2Y2021 announcements, it will be the highest record since Q4 2009. However, once the earnings announcement concludes, financial market information flow will likely slow down during August. There are three big questions we look to have answered during the month and will be keeping an eye on certain data to provide insights.
Will Growth Expectations Change?
Generally, when macroeconomic growth expectations increase, so do earnings expectations. While the July 2021 ISM US Manufacturing PMI reading showed a slight decline month-over-month, the data will likely not yet capture the recent increase in COVID-19 cases. Thus the August Markit U.S. flash PMI, which is similar in concept to the ISM version but calculated during the middle of the month, will better capture the COVID-19 impact on growth expectations. Currently, U.S. growth expectations remain firmly in the expansionary territory; however, they are high relative to history. Also, we see expected U.S. equity earnings growth slightly lower than what U.S. macroeconomic growth expectations would imply. A slight contraction in U.S. macroeconomic growth expectations is not likely to derail U.S. equity market earnings expectations.
Inflation, Inflation, Inflation
The July U.S. Federal Reserve Bank Meeting provided little insight into the U.S. monetary policy conversation. Chairman Powell highlighted that the labor market “has a way to go.” Financial markets are concerned about whether inflation is transitory or permanent. Notably, the Fed can change monetary policy by adjusting either asset purchases or short-term interest rates. We think that the market may get nervous about central bank policy during the period between the next U.S. Consumer Price Index (CPI) reading (08/11/21) and the Jackson Hole Economic Symposium, which occurs in late August. Historically, during the period leading up to the Jackson Hole Economic Symposium, many of the Fed speakers refrain from providing commentary to traditional media.
Low Historic Returns
Over the past ten years, August has been the second-worst performing month for the S&P 500 [2]. August is a common month for many financial market participants and government entities to go on vacation. What interests us is that the S&P 500 has not yet experienced a 10%+ correction this calendar year and has been on a significant positive trend since March 2020. A strong positive trend does not imply that a correction must occur. However, the seasonal performance, low information flow, and the time gap between the CPI and the Jackson Hole event seem like the perfect combination for financial market volatility to return.
Sources:
- Factset Earnings Insight 07/30/2021
- Source: Innealta Capital. Time frame: 09/01/2020 to 08/31/2020
This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Innealta Capital, LLC as to its accuracy, completeness or correctness. Innealta Capital, LLC does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Innealta Capital, LLC has no obligations to update any such information.
832-INN-08/05/2021
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