The months of November and December have traditionally always been the strongest months of the year on the stock exchange. The term “year-end rally” is sometimes used when prices are going up. The year 2021 has been a positive one for equity investors so far. The S&P 500 index, the index tracking the 500 biggest listed US companies, has gained about 25% in the year to date. Over the past five years, share prices have doubled on average (source: Refinitiv Datastream, as of 15 November 2021) despite the set-backs in the second half of 2019 and in spring of 2020 (the latter one due to corona).
More than 80% of companies exceeded their earnings estimates
In this article, we want to discuss the fundamental factors that have been driving the strong performance. How did the companies really do? Did they fulfil or even exceed their sales and earnings forecasts? In the USA, the Q3 reporting season is drawing to an end. By the beginning of the week, 92% of the S&P 500 companies had reported their results. Despite the dampening factors such as rising inflation, the sharply increasing covid numbers, and the supply bottlenecks in the industrial sector (especially due to shortages in the semiconductor segment), US companies reported surprisingly good figures: 81% of companies exceeded earnings expectations, 75% also exceeded sales expectations.
Q3 2021 earnings growth increased relatively to its referential 2020 figure by 39.1% y/y (source: FactSet). The consensus had estimated an increase of 27.4%, which would have already been significant. Historically speaking, this was the third-best Q3 ever. All sectors recorded positive growth, belying all those who had foreseen a slump in the economy after the lockdown rebound.
Financials and energy sector on top
The financial sector recorded the biggest gap between expected and actual results, while the energy sector posted the biggest discrepancy between analyst consensus and sales growth. At 12.9%, profit margins fell slightly short of expectations, but they remained close to the record highs of previous quarters and well above the 5Y average of 10.9%.
Valuations above long-term average
The relatively high equity valuations are the only fly in the ointment. At currently 21.2x, the 12M PE ratio is substantially above both 5Y (18.4x) and 10Y average (16.5x). The price hikes – mainly, but not only, in the energy sector – have affected the analysts’ estimates: for the ongoing Q4 they expect profit growth to continue at about 20% and sales growth to remain above 12%
YOU INVEST maintains high equity ratio
If you do not want to keep track of stock exchanges, inflation, and interest rates on a daily basis, YOU INVEST could be a comfortable way of building capital. YOU INVEST excels in flexible solutions, professional management, and high transparency. The variable allocation across several different asset classes is a crucial factor for a successful investment. Every asset class comes with different return chances and risks of losses. In order to establish an optimal ratio of risk and return, we diversify across a broad range of asset classes such as money markets, bonds, equities, and alternative investments. We also invest in various different regions and currencies. YOU INVEST is offered in various different types, depending on the degree of risk. We currently maintain a relatively optimistic equity ratio in all these types, which has paid off in terms of performance (please see the chart below).
YOU INVEST active, one of the types of the YOU INVEST line, offers investors a dynamic mix of different asset classes. The portfolio is continuously monitored by Erste Asset Management investment experts and optimised in accordance with the current opportunities in the market. The focus remains on equities, which account for the largest part of the portfolio at 42.8% (of a maximum of 50%). Due to the good economic environment and the earnings forecasts from companies, we also invest in high-yield bonds to optimise return. The fund remains underinvested in interest-sensitive government bonds that could be negatively affected by rising yields. Despite the positive growth outlook, stock exchanges may be subject to profit-taking and set-backs for other reasons at any time. It is therefore important to keep an eye on the risks of the markets. The fund managers of YOU INVEST active can quickly adjust the investment strategy to the market conditions and, for example, increase the bond or gold ratio.
CONCLUSION: the US companies have recorded high earnings and sales growth, as reflected in the drastic increase in share prices. If you do not want to keep track of the market on a daily basis but still want to benefit from return opportunities, YOU INVEST could be what you are looking for.
Prognoses are no reliable indicator for future performance.