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Q4 earnings: Good news, bad news

Summary:
With 96% of S&P 500 companies having reported, Q4 earnings season is all but over. For the markets, the earnings reports contained both good news and bad news.  There was plenty of good news. Both EPS and sales beat rates were well above their historical averages. In addition, consensus earnings estimates have been rising steadily, and forward 12-month EPS estimates have nearly recovered to pre-pandemic levels. In fact, the pace of Q1 estimate revisions is the second highest in FactSet’s history, second only to Q1 2018. The bottom-up assessment The tone from earnings calls is nothing short of giddy, according to The Transcript, which monitors earnings calls. Covid cases are dropping, vaccines are being administered and warmer weather is coming.  Fatigued consumers are

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With 96% of S&P 500 companies having reported, Q4 earnings season is all but over. For the markets, the earnings reports contained both good news and bad news. 
There was plenty of good news. Both EPS and sales beat rates were well above their historical averages. In addition, consensus earnings estimates have been rising steadily, and forward 12-month EPS estimates have nearly recovered to pre-pandemic levels.
Q4 earnings: Good news, bad news
In fact, the pace of Q1 estimate revisions is the second highest in FactSet’s history, second only to Q1 2018.
Q4 earnings: Good news, bad news

The bottom-up assessment

The tone from earnings calls is nothing short of giddy, according to The Transcript, which monitors earnings calls.
Covid cases are dropping, vaccines are being administered and warmer weather is coming.  Fatigued consumers are ready to return to normal.  We especially miss traveling.
Barring another wave of rising infections, the consumer is ready to spend.
Covid fatigue is real
“Now after 11 months of pandemic, I think we all know that COVID fatigue is real. People are clamoring for the opportunity to have experience outside their homes. Every day, we see signs of people want to get out and get away” – Royal Caribbean Cruises (RCL) CEO Richard Fain
And cases are dropping
“So I must admit every single day I go on the COVID U.S.A. chart on Google, and so how the trend line is and it’s just plummeting. So my sense is, is that we’re getting closer and closer to good news.” – Royal Caribbean Cruises (RCL) CFO Jason Liberty
By April vaccines should be available to everyone
“…vaccinations were ultimately going to be the deciding factor. And the quicker we vaccinate where we get to the point of herd immunity, which by most accounts, that timeframe is in the July, August time. So sometime in summer, the experts believe that by the end of April, anyone who wants a vaccine…will have access to one that all bodes well.” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio
And we’re getting closer to warmer weather
“…we believe based on all the experts that we talked to, including the Healthy Sail Panel that we’re going to see a continuation of the significant drop in cases as we enter spring summer, as we continue to vaccinate over 1.5 million Americans a day, as more people get infected and recover.” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio 
Consumers are ready to get back to normal
“…we’ve already been seeing the leisure recovery pick up since the beginning of the year when it was at its low point. Not only has occupancy been picking up in February, but overall bookings have consistently increased each week so far this year.” – Pebblebrook Hotel Trust (PEB) CEO Jon Bortz
People miss traveling more than anything else
“We did a survey recently of American travelers and we found a couple of things. The first thing we found is that people missed traveling, that’s not surprising, but we also found that people missed traveling more than any other out-of-home activity. People missed traveling more in America than going to a restaurant, going to sports, live music or other activities.” – Airbnb (ABNB) CEO Brian Chesky
There’s a lot of pent up demand
“Bookings and rebookings of weddings into the second half of 2021 and 2022 have been very strong, and we’re seeing rebookings of group into the second half of 2021 and all of 2022 as well…We’re very encouraged about how well group is shaping up for 2022 at this point.” – Pebblebrook Hotel Trust (PEB) CEO Jon Bortz
“…historically, we don’t really talk about 2022. But what we’re seeing continue on is our customers — there’s a lot of pent-up demand for vacations, right? They’re saving more. They bypass many of their vacations. And so they’re trying to eye out when, we’re going to return to service. And they’re going to be able to go and enjoy the vacations that they had previously planned. And so I think when you look at the first half of 2022, again, it’s very, very early, the pricing that we’re seeing relative to like-for-like for 2019 shows that our rates are up with or without any application of future cruise certificates.” – Royal Caribbean Cruises (RCL) CFO Jason Liberty 
“…we are very encouraged and very pleased by the strong booking activity driven by pent up demand across all three brands for 2022 voyages…For the first half of 2022 and for all of 2022, in fact, our load factor is currently well ahead of pre-pandemic levels” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio
Consumers are flush with cash
“The leisure customer has a humongous amount of money in the bank. There’s huge fiscal stimulus in the system and more coming, the Fed has been pumping capital into the market.” – Pebblebrook Hotel Trust (PEB) CEO Jon Bortz 
Limited supply creates pricing power
“…this is a finite capacity business. I can’t cruise with 150% occupancy. So there’s going to be a squeeze play here. That demand is going to exceed supply…you got less supply, you’ve got pent up demand. You’ve got people with money in their pocket. I think this is just the making of a boom time for the cruise industry. And since we can’t expand, supply any faster than it’s coming online, pricing is what’s going to dictate the day. And we’re seeing it. I mean, it’s astonishing to me in the 25-plus years, I’ve been in this business.” – Norwegian Cruise Line (NCLH) CEO Frank Del Rio

The top-up assessment

The top-down assessment upbeat. New Deal democrat, who monitors high-frequency economic data and splits them into coincident, short-leading, and long-leading indicators, has a highly constructive view of the economy.
(1) The economy is primed for strong takeoff once the pandemic is brought under control, as housing, manufacturing, and more generally production are strong, and commodities are red hot.
(2) The pandemic appears to finally be being brought somewhat under control, as about half of people in the high risk groups have received at least one dose, nursing home deaths are already down sharply, and with a third vaccine being approved, we are on track for herd immunity probably by the end of the summer.
(3) Seeing all this, together with the likely approval of a large new stimulus bill by Congress, the bond market has reacted by pushing rates higher. This is a “bullish” reaction, as the yield curve is very positive.
(4) The weather issues affecting some of the data series are transient and likely to last only one or two more weeks at most.
 

The fly in the ointment

Here is the bad news. The market has not reacted well to earnings beats, except for blow-out earnings reports.
Q4 earnings: Good news, bad news
In my recent publication (see Will rising yields sideswipe equities?), I made the case that the market is in a reflation phase of the market cycle. Reflation phases are defined by rising earnings estimates and rising bond yields. The bullish effects of rising estimates overwhelm the bearish effects of higher rates.
However, the muted market reaction to earnings beats raises the question of how much has been priced into earnings expectations. This represents a short-term risk to the stock prices, which may need a further sentiment reset before it can sustainably advance higher.
About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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