The Week in Review: February 16, 2021
Profit Growth
Still-low interest rates, fiscal stimulus and talk of more stimulus, new vaccines, and economic growth have been credited for the stock market’s powerful performance. While they have all played an important role, profit growth is now coming into play.
We are well into Q4 earnings season, which is usually defined as the S&P 500 companies that have been reporting results for the final three months of the year.
Let’s briefly dive into the numbers. With 74% of S&P 500 companies having reported through February 12, profits are expected to rise 3.4% versus one year ago, according to Refinitiv. (Projections are subject to change as the remainder of the season progresses.)
While 3.4% growth doesn’t sound impressive, S&P 500 profits had been forecast to decline by 9.8% in early January, just as companies were beginning to report Q4 results. That’s significant.
It’s even more impressive given that the economy has yet to fully recover to pre-pandemic levels.
Another way to look at it: Economic activity is still below one year ago using U.S. gross domestic product (GDP) as the benchmark (U.S. Bureau of Economic Analysis data). But S&P 500 profits are up.
Wall Street vs. Main Street
Why have profits outpaced economic activity? The S&P 500 Index is an unmanaged index made up of the 500 large U.S. companies. It’s well-diversified across the major sectors in the economy.
But these are big U.S. companies, and the pandemic has disproportionately hurt smaller, serviced-based firms.
William Lazonick, an emeritus economics professor at the University of Massachusetts at Lowell, told the Washington Post in December, “This is a global crisis, but the big companies are not treating it as one—they haven’t skipped a beat.”
Some industries have done exceedingly well amid pandemic-related distortions that have hurt some firms but have helped others. For example, we see benefits accruing to some technology firms and companies that are deemed essential.
But spending at local restaurants, theaters, sporting events, and travel remains under pressure.
Meanwhile, analysts, who have traditionally been conservative with their estimates, failed to factor in the strong economic bounce into forecasts. Cost-cutting is also playing a role.
As we look to 2021, analysts have been raising earnings forecasts. Of course, anything more than a few months into the future gets increasingly murky. And much will depend on how the overall economy performs.
If you have any questions or concerns, feel free to reach out to me or Tyler.
Two for the Road
If you think that the promise of free trading is too good to be true on the Robinhood app, you are probably right. Founded in 2012, Robinhood makes money, in part, by sending customer orders to high-frequency traders in exchange for cash. It’s a controversial but legal practice in the brokerage industry called payment for order flow. When you buy or sell shares on Robinhood, the app is likely executing your trade at a slightly worse price than another broker would. —The Wall Street Journal, November 9, 2018
"If you are not paying for it, you’re not the customer—you’re the product.” —Tom Johnson
This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
1. The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2. The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3. The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4. The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5. CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6. CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.