Economic Recovery Remains Firmly In Place

S&P 500 earnings update

The S&P 500 earnings per share (EPS) increased to $191.52 this week. This is the 10th straight week the EPS has increased, and 21 out of the 22 weeks so far this year.

Consumer Confidence came in at 117.2 for May, -0.3% below last month (which was revised down from 121.7 to 117.5), and +36.4% higher than a year ago. February and March results were both revised higher by +5.3% and +5.4% respectively.

“Consumers’ assessment of present-day conditions improved, suggesting economic growth remains robust in Q2. However, consumers’ short-term optimism retreated, prompted by expectations of decelerating growth and softening labor market conditions in the months ahead. Consumers were also less upbeat this month about their income prospects—a reflection, perhaps, of both rising inflation expectations and a waning of further government support until expanded Child Tax Credit payments begin reaching parents in July. Overall, consumers remain optimistic, and confidence should remain resilient in the short term, as vaccination rates climb, COVID-19 cases decline further, and the economy fully reopens.”

Consumers expectations index declined 8.2% for the month. The percentage of consumers expecting business conditions to improve over the next six months declined 8.5%, while the percentage of consumers expecting business conditions to worsen over the next six months increased 22.3%.

The ISM Manufacturing PMI came in at 61.2 for May, an increase of 0.5% for the month and the 12th straight month of expansion (readings above 43.1 indicate expansion). The new orders index increased 2.7% for the month, while the prices index (input costs) declined 1.6%. 16 of the 18 manufacturing industries reported growth for the month.

“The Manufacturing PMI continued to indicate strong sector expansion and U.S. economic growth in May. All five
subindexes that directly factor into the Manufacturing PMI® were in growth territory.”

“Manufacturing performed well for the 12th straight month, with demand, consumption and inputs registering strong growth compared to April. Panelists companies and their supply chains continue to struggle to respond to strong demand due to the difficulty in hiring and retaining direct labor. Record backlog, customer inventories and raw material lead times are being reported. The manufacturing recovery has transitioned from first addressing demand headwinds, to now overcoming labor obstacles across the entire value chain.”

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The ISM Services PMI reached another new all time high in May, coming in at 64. A gain of +1.3% over the prior month.

“According to the Services PMI, all 18 services industries reported growth. The rate of expansion is very strong, as businesses have reopened and production capacity has increased. However, some capacity constraints, material shortages, weather-related delays, and challenges in logistics and employment resources continue.”

The BLS Non-farm employment report showed a net jobs gain of +559,000 in May. March and April results were both revised higher, March went from +770K to +785K, and April went from +266K to +278K, a net jobs gain of +27K higher than previously reported.

Approximately 87% of the job gains came from the private service providers, with leisure and hospitality reporting a net gain of +292K jobs.

Average weekly hours remained the same as the last month, at 34.9, and average hourly earnings increased +0.5% for the month.

13 months into the jobs recovery and we’ve now recovered about 66% of the net job losses. Still 7.6 million below pre-COVID highs.

h2 Notable earnings/h2

Another great company whose stock price is already priced near perfection at 21x sales and 45x forward earnings. The surge in demand due to data mining cryptocurrency could lead to volatility if the crypto trend were to reverse, like it did in 2018. The company is executing very well in all segments, and if the ARM deal goes through (roughly a 50/50 chance right now) it would only strengthen its competitive advantages.

Revenues grew 70% year over year and came in about 4% above street expectations. Sequential revenue growth came in at 14%, slightly below the company’s average since IPO of 17%. The company guided for approximately 63% revenue growth (14.3% sequential growth) in the next quarter (orange bar in chart above).

Customer count grew 82%, now 11,420, with 64% of customers buying at least 4 of the company’s cloud security products.

This weeks charts are the cumulative advance-decline lines for the New York Stock Exchange and the S&P 500 index. It takes the number of stocks that close higher and subtract the stocks that close lower on a daily cumulative basis. My favorite technical indicators that show the level of participation under the surface. Both charts continue to soar higher, showing a broad level of participation in these rallies. There are no signs of exhaustion here. And next time someone tries to tell you this rally is being led by only a handful of tech stocks, feel free to show them these charts.

h2 Summary/h2

The economic recovery remains firmly in place. There are some signs the growth rate may be peaking, but that is to be expected. I’m watching for the shift in consumer spending from goods to services now that the economy is really starting to reopen. There is a lot of pent up demand for those services that were most affected by the restrictions. This months jobs report reflected that, as the biggest category for job gains came from the leisure and hospitality sector.

As for the jobs report, I thought it was decent overall even though the net jobs gained came in lower than expected for the second straight month. Actually, I think it was a “goldilocks” report in that it was strong enough to show the expansion is still in place, but not too strong as to have any effect on the Federal Reserves current policy. If net jobs gained came in at 1 million, the market might have interpreted that as a precursor for tighter monetary policy. Unfortunately, this is the environment we are in.

Earnings are still great, interest rates are still very low, the economic expansion is still in place, and there remains broad participation in the stock market advance. All this remains supportive of risk assets. Doesn’t mean we can’t have a correction, and 2020 showed us that something can always come out of nowhere and change everything. The inflation concern is real, but there is no reason to get ahead of ourselves at the moment. Next weeks CPI report will be interesting.

This week there are two S&P 500 companies reporting earnings. For economic data we have the NFIB small business optimism index on Tuesday and the increasingly important gauge of inflation via the Consumer Price Index (CPI) on Thursday.

/h2

Written By: Michael Gouvalaris