{"id":9787,"date":"2021-08-22T15:13:25","date_gmt":"2021-08-22T15:13:25","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9787"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"2021-surprises-earnings-higher-rates-lower-than-expected","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/2021-surprises-earnings-higher-rates-lower-than-expected\/","title":{"rendered":"2021 Surprises: Earnings Higher, Rates Lower Than Expected"},"content":{"rendered":"\n<p>At the beginning of 2021, there was broad consensus U.S.\ncorporations would post a strong earnings\u2019 rebound, and many believed interest\nrates would move higher alongside economic growth and rising inflation. Market\nparticipants set expectations for both outcomes.<\/p>\n\n\n\n<p>Checking in a little more than halfway through the year, I\nthink we can make two observations: earnings have been higher-than-expected,\nwhile interest rates continue to be lower-than-expected. If you\u2019re looking for\na succinct explanation for why the S&amp;P 500 index is up close to 20% for the\nyear, I think that\u2019s it. <\/p>\n\n\n\n<p>There are always many moving parts when it comes to\nanalyzing the equity markets, of course, but the two factors I think that matter\nthe most are earnings and interest rates. Everything else we see and read in\nthe financial news\u2014the good and the bad, the valued fundamental indicators and\nthe noise\u2014only matter, in my view, <em>if\nthey affect how earnings and\/or interest rates will change in the future<\/em>. The\ncurrent situation in Afghanistan, for instance, may feel like a huge deal, but I\nsee very little possibility of it affecting U.S. earnings or interest rates in\n2021. To me, it is an important geopolitical event, but it has no pricing power.<sup>1<\/sup><\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_08_23&amp;content=stock_market_outlook_report\">Are You Managing Your Expectations in a Market Full of Surprises?<\/a><\/strong><\/p>\n\n\n\n<p>It\u2019s always a positive when the market turns out\n\u201cbetter-than-expected,\u201d but what happens when the market plunges? What can\ninvestors do to protect their investments? &nbsp;<\/p>\n\n\n\n<p>Get answers to these questions and more with our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces 2021 optimism?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year<\/em><\/li><li><em>Zacks ranks industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!&nbsp;<br> <strong><br>IT\u2019S FREE.&nbsp;<a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_08_23&amp;content=stock_market_outlook_report\">Download the Just-Released September 2021 Stock Market Outlook<\/a><sup>2<\/sup><\/strong><\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p>On the other hand, when U.S. corporations are performing\nmuch better than most analysts expect them to, that does have pricing power. In\nthis Q2 earnings cycle, revenue momentum has been particularly notable, with aggregate\nquarterly totals on track to reach an all-time high. The charts below show revenue growth rates and earnings\nand revenue beat percentages for companies that have reported so far, and the\npercentage of companies beating (right-hand side) really stands out. That\u2019s\nwhat \u201cbetter-than-expected\u201d looks like.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/Image-1-for-client-version.png\" alt=\"\" class=\"wp-image-9788\"\/><figcaption>  Image Source: Zacks Investment Research <\/figcaption><\/figure>\n\n\n\n<p>Many point out \u2013 correctly \u2013 that the strong revenue and\nearnings growth rates are due to the base effect, i.e., comparing Q2 2021\nrevenue to Q2 2020 revenue, when the economy was largely shut down. But even\nwhen we compare Q2 2021 earnings to Q2 2019 earnings, we find that corporations\nare on track to post earnings +30.9% higher than they were in 2019, pre-Covid.\nThat is a very significant point that is not discussed often enough, in my\nview.<\/p>\n\n\n\n<p>This largely better-than-expected performance from\ncorporations has also resulted in upward revisions to Q3 earnings expectations,\nwhich started the year at 13.5% y-o-y growth and have since climbed to 26.2%\ny-o-y growth. This sustained optimism from corporate America comes even as the\nDelta variant is dealing a few setbacks to travel, hospitality, restaurant, and\nother in-person business operations. It\u2019s a strong signal that companies feel\nable to navigate their way through the next few months.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/motm_08182021-1024x745.png\" alt=\"\" class=\"wp-image-9789\"\/><\/figure>\n\n\n\n<p>On the interest rate front, everyone expected longer\nduration U.S. Treasury bonds to drift higher over the course of the year, and some\neven expected yields would spike as growth surged and inflation expectations\nwent up. But so far, interest rates have been doing just the opposite. As you\ncan see below in the chart of the 10-year and the 30-year U.S. Treasury bond\nyields, interest rates briefly drifted higher earlier in the year but have\nsince fallen back. <\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/pic4-1024x395.png\" alt=\"\" class=\"wp-image-9790\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>When interest rates ultimately end up lower\nthan everyone expects them to \u2013 as we saw in the first half of the year \u2013 stock\nprices usually rise. This time was no different. <\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors <\/strong><\/p>\n\n\n\n<p>In my view, the stock market has performed\nwell and reaching new all-time highs because aggregate earnings are coming in\nhigher than expectations, while interest rates are far lower than expectations set\nearlier in the year. Positive surprises are great for stocks, in my view.<\/p>\n\n\n\n<p>Looking ahead to the second half of the\nyear, I think current expectations are that interest rates should eventually\nrespond to higher inflation, while the corporate profit cycle has reached a\npeak and is likely poised to decelerate from here. Expecting higher rates and\nlower earnings may ultimately be a good thing, as it sets the stage for even\nmore positive surprises. &nbsp;<\/p>\n\n\n\n<p>To be prepared for any surprises in the market, whether it\u2019s positive or negative, I recommend staying focused on key economic indicators. Our&nbsp;<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_08_23&amp;content=stock_market_outlook_report\">Just-Released September 2021 Stock Market Outlook Report<\/a><sup>3<\/sup>,<\/strong> will give you insight into all of it!<br> &nbsp;<br> This report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you&#8217;ll discover Zacks\u2019 view on:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces 2021 optimism?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year<\/em><\/li><li><em>Zacks ranks industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Stocks have outperformed expectations. Interest rates are lower than predicted. What happens next?<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-9787","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9787","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9787"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9787\/revisions"}],"predecessor-version":[{"id":10331,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9787\/revisions\/10331"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9787"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9787"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9787"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}