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Earnings Season: Companies Can’t Just Beat, They Must Crush Estimates

Published 01/31/2022, 11:05 AM
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Equity index futures are pointing slightly lower as last week’s range appears to be continuing into the new week. The economic and earnings calendars are full, giving investors a slew of information to sift through. With so much talk around the Federal Reserve raising rates, many investors want to skip forward to the March Fed meeting already. Monday could see some volatility in certain popular stocks as these final days can be used by some money managers for a little window dressing—selling laggards in favor of leaders to look like they have been on the right side of the market.

This week the economic calendar is filled with labor market reports, starting on Tuesday with the JOLTs, or job openings survey. The ADP Nonfarm Employment report comes out on Wednesday. Thursday we’ll see the weekly jobless claims. Finally, the big jobs report known as the Employment Situation Report will be released on Friday. Normally, analysts’ estimates of Friday’s job numbers are in a relatively tight range. Currently, they’re all over the place, which is one reason for the constant negativity.

Earnings season is in full force, but there’s still much more to come. According to FactSet, 33% of the companies in the S&P 500 index have reported. Of the companies that have reported, 77% have beat analysts’ earnings estimates, which is above the average of 76%. However, the average “beat” is about 4% above estimates, which is lower than the last five-year average of 8.6%. So, what we’re seeing is that companies can’t just beat estimates, they have to crush them. Last week we saw Microsoft (NASDAQ:MSFT) beat on estimates and sell off. Yet, after MSFT’s conference call, it was able to lay out a solid plan going forward, and the stock rallied.

The major stock market indices traded higher on Friday with the Nasdaq Composite leading the rally and climbing 2.11%. The S&P 500 rose 1.56%, and the Dow Jones Industrial Average traded about 1% higher. The technology sector also led the rally with the Technology Select Sector Index rising 3.4%, followed by the Real Estate Select Sector Index at 2.5%, and the Health Care Select Sector Index closing 1.44% higher. The inflationary sectors, including energy and materials, were the only ones to end the day in the red.

However, weekly performance was a bit different. The Dow Jones Industrials was the best performer, closing about even for the week. The S&P 500 was down about 1%. And the Nasdaq closed the week about 2.5% lower. When you consider that the Nasdaq has swung between a range of 7% for the week, it’s amazing that the index had a relatively small change. However, the Nasdaq is still on track for its worst January ever.

The energy sector was the only positive sector last week, with the Energy Select Sector Index rising a staggering 13.9%. On the other side, the Consumer Discretionary Select Sector Index fell nearly 16% on the week. While all sectors other than energy were negative this week, the Technology Select Sector Index was the only other sector in double-digit losses, dropping nearly 11%.

Apple (NASDAQ:AAPL) continues to develop its reputation as a bellwether company by beating on earnings and revenue and then leading technology and the tech-heavy Nasdaq higher on Friday. AAPL rallied 6.98% on Friday and may have set the tone for its mega-cap peers this week, including Alphabet (NASDAQ:GOOGL), Meta (NASDAQ:FB) and Amazon (NASDAQ:AMZN), who are all in the earnings lineup.

Slow Reaction Times?

The Federal Reserve is coming under fire for what some are seeing as being too slow to react to faster inflation and the raising of interest rates. On Friday, BofA Global Research issued a note suggesting that the Fed should raise the overnight rate in each of the seven remaining meetings this year. At a quarter of a point each, that would set the overnight rate at 1.75% by the end of 2022.

While the desire for more aggressive rate hikes isn’t universally shared, a growing list of prominent investors, economists and figures is pushing the Fed to be more aggressive. Two weeks ago, JPMorgan (NYSE:JPM) CEO Jamie Dimon said the Fed would have to raise rates six to seven times this year. Allianz Chief Economic Adviser Mohamed El-Erian criticized the Fed for not understanding the nature of the inflation in 2021 and failing to react more swiftly. Jefferies Chief Financial Economist Aneta Markowska was also critical of the Fed for not recognizing the inflationary problems and reacting sooner. However, others are less critical: Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, pointed out that the changes have been so fast that it’s understandable that inflation wasn’t caught sooner, as long as the Fed readjusts to the information.

In December, Fed Chairman Jerome Powell said the Fed would target rate hikes up to 0.90% by the end of 2022. Powell didn’t reiterate that target in the January meeting announcement or press conference. Instead, he elected to emphasize that the Fed would remain data driven from meeting to meeting.

Long-Term CPI Chart.

CHART OF THE DAY: I’M NOT FOLLOWING. Monthly changes in the Consumer Price Index (CPI—red/green) have led changes in the Federal Funds Rate (pink) over time. However, the Fed has been less responsive to the CPI in the last 10 to 13 years. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Bond Vigilantes: With the Fed being slower to act on rising inflation, some market analysts are looking for a return of the bond vigilantes. A bond vigilante is a bond investor that grows increasingly frustrated with monetary and fiscal policies that fail to reduce the money supply or reduce government spending, so they sell their bonds in the money markets and drive up interest rates.

During October 1993, bond vigilantes were able to push the 10-year yield up from 5.2% to more than 8% over frustration related to federal spending. The period became known as the Great Bond Massacre. The Clinton administration reacted by passing legislation in an attempt to cut spending.

Bond vigilantes may have resurfaced again during the Eurozone crisis of 2009, when numerous European countries known as the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were borrowing and spending too much money. However, the central banks may have been able to stave off the group.

There’s no way to tell if bond vigilantes will make a return in 2022. While there was a lot of bond selling in December, the 10-year yield has only moved from about 1.4% to 1.8%. Additionally, concerns around inflation basically stopped President Joe Biden’s Build Back Better spending bill, so the vigilantes may not feel the need to return any time soon.


Sticky Situation:
One reason that market participants are putting pressure on the Fed to raise rates is the fear of rising oil prices. Oil prices tend to be cyclical, falling in October as demand decreases through the winter months when fewer people travel and then turning around in February as demand picks up again. However, oil prices fell for only a short time around the end of 2021 then quickly rallied back.

According to Barron’s, more and more analysts are projecting that oil prices will rise above $100 this summer, and many are projecting much higher. Goldman Sachs (NYSE:GS) issued a target of $105 for 2022 and projected higher in 2023. Morgan Stanley (NYSE:MS) analysts are targeting $110. Bank of America (NYSE:BAC) analysts are forecasting $120. Finally, JP Morgan analysts are expecting a staggering climb to $150. However, not all analysts see oil rising. Citigroup (NYSE:C) analysts think oil prices will fall to $65 by the end of 2022 as many of the transitory inflation issues related to the COVID-19 pandemic pass.

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