Global Equity and International Strategies Second Quarter Review

Global stock markets continued to rise during the second quarter with the S&P 500 increasing by 8.2% and the MSCI World Index rising by 7.3%. On a year-to-date basis the S&P 500 is up 14.4% and the MSCI World Index is up 12.2%. The year-to-date return for the S&P 500 is the 2nd best first-half performance since 1998. The best first half return since 1998 was generated in 2019 when the S&P 500 increased by 17.4% in the first six months of the year. The robust stock market returns of the last six months have been driven by strong economic data as the global economy continues to reopen helped by COVID-19 vaccinations and trillions of dollars of fiscal stimulus. The handsome year-to-date gains are on top of the attractive gains that have been generated since the market bottomed in March of 2020 with the S&P 500 and the MSCI World Index both up more than 80% over the last 15 months.

Is the Recent Uptick in Inflation Transitory?

Based on our recent conversations, it is apparent that there is a major debate going on with regards to the rate of inflation and the sustainability of it. As seen in the chart below, inflation has soared in recent months and this has created some concern for investors.

During the month of May, the Consumer Price Index (CPI) rose by 5% compared to one year earlier. This was above the 4.7% rise that was forecasted by Economists and it marked the largest increase in the CPI since August of 2008. The Consumer Price Index is a closely watched measure and it represents a basket of goods including food, energy, housing costs, and sales across a spectrum of goods.

The key question as it pertains to this recent bout of inflation is whether it will be long lasting or whether it will be more transitory in nature. There are good arguments to be made for both cases and it is possible that both scenarios will prove to be correct over time. In the short term, there are good reasons to believe that inflation will remain stubbornly high. However, over the medium and long term these inflationary pressures should subside.

From our vantage point, the recent uptick in prices that is being felt by both businesses and consumers is largely driven by transitory disruptions that have occurred across various supply chains. These supply chains include food, semiconductors, oil, lumber, copper, shipping containers, and trucking. The supply shocks that are happening are an outcome of several factors that can be tied to the pandemic response. In the early stages of the pandemic there was a series of shutdowns that affected businesses across a wide range of industries. These shutdowns were made not only due to concerns about falling demand but also public safety measures that were implemented to contain the spread of the COVID virus. In hindsight, the magnitude of the shutdowns proved to be far too pessimistic. The shutdowns significantly underestimated the speed at which vaccines would get approved and the resulting rebound in demand. As a result of this, the demand side of the economy has rebounded faster than expected and the supply side of the economy has not been able to ramp up production fast enough to satisfy this demand. This helps to explain why we are now experiencing a spike in inflation.

It’s easy to see why there is an ongoing debate about inflation. The inflation bears can point to certain corners of the market that have already started to simmer down. Take lumber, one of the biggest gainers among commodities over the last year as Americans poured money into home remodeling. The price of lumber has collapsed by 40%1 since its peak in May. The booming U.S. housing market has also cooled as measured by building permits, which are a forward-looking indicator for home sales. For the month of May, building permits fell by 3.0%2 to just under 1.7 million units. This represented a seven-month low and the decline was widespread across regions and property types. Copper is another commodity that has eased from an all-time high. However, the inflation bulls can point to the numerous areas of the economy where supply constraints remain and torrid demand have left prices at multi-year highs. The answer to the inflation debate is that it can probably be found somewhere in the middle.

The hope that inflation will remain low forever and that interest rates will remain near zero forever seems unrealistic. This is especially the case given the communication that came out of the Federal Open Market Committee meeting this week. In a nutshell, The Federal Reserve raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates.

On the other hand, we believe there is a low likelihood that the global economy will return to the high levels of inflation that occurred during the 1970’s and the 1980’s. The rationale behind this line of thinking is that there are several counter-inflationary secular trends that exist in the world today with Technology at the forefront of these trends. Technology acts as a counter-inflationary force in the global economy in several ways. Automation and robotics on the factory floor have improved productivity and lowered the cost of manufacturing. The rise of Ecommerce and the Internet has led to greater price transparency. This has resulted in greater price competition and has squeezed out high-cost producers across a number of global industries. Demographics is also a secular trend that provides a counter inflationary force for the global economy. The world is aging, people are living longer, and they are having fewer children. As people get into their 60’s and 70’s, they tend to spend less and become more frugal. An economy with aging demographic trends is likely to grow more slowly and generate less inflation.

So how should investors protect their portfolios given the prospects of rising inflation and higher interest rates? We believe that investing in high quality companies is the best way to insulate our portfolios given the expectation of higher inflation and rising interest rates. High quality companies typically operate in industries with high barriers to entry. This makes it difficult for new competitors to enter the market and typically enables the incumbents to earn above average returns on invested capital for extended periods of time. It also means strong pricing power and very stable cash flow generation. These attributes will protect them as the global economy transitions to a higher inflationary environment. In terms of higher interest rates, it means increased borrowing costs and reduced cash flows for highly indebted companies. High-quality businesses are somewhat insulated from this given that they are characterized by robust financial strength and consistent free cash flow generation. This reduces their dependence on debt capital and the negative impact to their earnings from higher borrowing costs.

In summary, we do believe that inflation will remain elevated in the near term but we do not believe that we are entering a period of substantially higher inflation like what was experienced in the 1970’s and 1980’s. Furthermore, we believe that our portfolios are very well positioned for the current environment given the high quality attributes of our investments.

Have a good weekend,


  1. Factset Data
  2. 2.CNBC

The Transition to Mid-Cycle

Despite recent bouts of volatility global equity markets continue to be resilient. The MSCI World Index is up 9.4% on a year-to-date basis and it is up 4.7% on a quarter-to-date basis. These are very attractive gains especially if they were converted into annualized figures. As we all know by now, the global economy has recovered from the COVID-induced recession at a much faster rate than what was originally expected. Global equity markets have reacted accordingly with the MSCI World Index up more than 80% from the bottom that was established in March of 2020. So where do we go from here?

Based on various observations, we believe that the global economy has transitioned from early cycle to the mid-cycle stage. In the year that followed the stock market bottom (March 2020), global equities exhibited classic early cycle behaviour. The factors that led the stock market during the first year of the recovery were very typical and included small caps stocks and equities with high betas, high leverage, and low quality. The sectors that outperformed were textbook early cycle winners and included retail, autos, materials, semiconductors, home builders, banks, and transportation. On a historical basis, the early stage of the economic cycle can last up to two years. However, in the current cycle the early cycle phase was much shorter than usual given the V-shaped nature of the global economy recovery. The recession of 2020 was a different kind of recession given that it was triggered by a global pandemic. It was not caused by the typical factors that cause recessions such as overheating or asset bubbles. This is very important because the consumer and global corporations went into the recession from a position of strength. This is one of the key reasons why the global economy generated a V-shaped recovery and one of the fastest economic rebounds in history. It’s also why we have transitioned to mid-cycle at a quicker pace than previous cycles.

Some of the signs that lead us to believe that we have moved beyond early cycle include the recent underperformance of small cap stocks, a rebound in quality stocks, and a sharp decline in highly valued stocks. As measured by the Russell 2000, small cap stocks have underperformed the S&P 500 by more than 10% since March. High quality stocks which lagged significantly in the first year of the new bull market have recovered substantially over the last 2 months. Finally, some of the speculative high-flying stocks have experienced sharp declines over the last several months. This includes stocks such as Peloton, Teladoc, and Tesla, just to name a few.

What should investors expect during the mid-cycle phase of the current economic cycle? While we expect economic growth to remain robust, we do expect more volatility in the stock market and an increase in inflationary pressures. This will lead to rising bond yields and eventually interest rate hikes from central banks around the world. This typically leads to a contraction in the Price-to-Earnings ratio for global stock markets. This may sound like bad news on the surface. However, what it likely means is more volatility but still positive gains for the global equity markets.

Looking back at previous market cycles can provide some context. In both 2003 and 2009, the S&P 500 generated substantial gains as the economy exited the recession. After the large snapback rallies, the S&P 500 moved to a choppier phase in 2004 and 2010 as seen in the chart below.

2004 and 2010 marked the second years of those respective bull markets. Despite the choppiness that ensued in both periods, the bull market in both time periods still had several years remaining. Although it is reasonable for investors to expect more volatility, stock market gains have typically been positive during the second year of a new bull market as seen in the chart below.

Based on data going back to 1957, the S&P 500 has generated an average return of 43.3% in the first year of a new bull market. During the second year of a new bull market the average return was 13.3%.

So how should investors position their portfolios for the mid-stage phase of the economic cycle? Given the expectation for rising inflation, we believe it is important to invest in companies with strong pricing power. These types of companies will be very well positioned as they can pass along rising input costs. Companies with pristine balance sheets will also be well positioned as they will be insulated from the impact of higher interest payments associated with rising interest rates. In addition, we believe it is important to avoid companies with elevated valuations. In an environment where Price-to-Earnings multiples are compressing, it is of paramount importance to avoid companies with unreasonable valuations. Our portfolios are constructed with high-quality companies that are highly profitable across the business cycle. The companies we own are resilient and many of them emerged from the COVID pandemic in an even stronger position than they were previously. Furthermore, our companies hold leadership positions in attractive industries which gives them strong pricing power. This will protect them as the global economy transitions to a higher inflationary environment. Our companies also have strong balance sheets and we believe they trade at reasonable valuations. In summary, we believe that our portfolios are very well positioned for the mid-stage phase of the economic cycle.

Have a good weekend,


A Perspective on Earnings Revisions and Pent-Up Demand

Global equity markets have continued their upward trajectory over the last several weeks. During the month of April stocks were particularly strong with the S&P 500 up 5.3% and the MSCI World Index increasing by 4.7%. The strong gains are being driven by optimism around prospects for a strong post-Covid economic rebound fueled by pent-up demand and unprecedented levels of monetary stimulus. The global vaccine roll-out is also providing a boost to the recovery and helping consumer confidence. On the back of the large gains in the stock market, concerns around valuation have begun to surface more frequently. Although these concerns are valid, there are some factors to consider.  

During the early stages of an economic recovery, stocks typically appear expensive on valuation metrics such as the PE ratio (Price-to-Earnings ratio). During economic recessions corporate earnings become depressed and this causes valuations to look expensive. This has occurred during previous recessions and was particularly noticeable during the downturns of 2001-2002 and 2008-2009. This phenomenon is especially pronounced for the Trailing 12-month PE ratio as seen in the chart below. The various spikes in the blue line (the Trailing 12-month PE ratio) illustrate this point. 

Although the trailing 12-month PE ratio is helpful, it is a backward-looking indicator. In our view the 12-month forward PE ratio is more meaningful as it provides information about the future. This metric is represented by the red line in the chart above. The 12-month forward PE ratio is currently elevated and is above the long-term average. We would be concerned by this metric if we looked at it in isolation and assumed all else equal. However, one must consider the level of earnings revisions. One of the reasons we remain cautiously optimistic about global equities for 2021 is related to the magnitude of positive earnings revisions. As seen in the chart below, positive earnings surprises for the S&P 500 are at their highest level in the last 35 years.

What this means is that consensus earnings estimates have been underestimated and are now being revised significantly higher. One of the reasons this has occurred is that analysts cut their earnings estimates by huge amounts after the pandemic struck the global economy in March of 2020. At that time, stock analysts slashed and burned their earnings estimates given that the world had just entered the deepest recession since the Great Depression. As we all know this recession was very short lived thanks to the vaccine approvals and unprecedented levels of fiscal and monetary stimulus. The speed and the magnitude of the global economy recovery has forced analysts to revise their estimates higher and there could be more to come. What this means is that the stock market may not be as expensive as it looks on the surface.

Positive earnings revisions are always a welcome sign. But it’s especially impressive at this point in time given that the world is still in the very early stages of re-opening the economy. Once that happens, there is a substantial amount of pent-up demand that should provide a key driver for sustained growth in the global economy.

How much pent-up demand are we talking about? We believe there is a huge amount of pent-up demand given that most people were trapped inside their home for the better part of the last year. As most people get vaccinated, they will want to travel, eat at restaurants, go shopping, and go see concerts and live sporting events. One way to think about the level of pent-up demand is to look at excess savings. Moody’s defines excess savings as the additional savings compared with the 2019 spending pattern and equating to more than 6% of global gross domestic product. Based on this definition, households have saved massive amounts of money since the start of the pandemic. This point is illustrated in the chart below.

Based on this definition, it has been estimated by Moody’s that consumers around the world have stockpiled an extra $5.4 trillion of savings since the pandemic began. As seen in the chart below, consumers have accumulated a level of savings that is well above the average of the last 20 years.

Furthermore, consumers are becoming increasingly confident about the economic outlook, paving the way for a strong rebound in spending as economies re-open around the world. As seen in the chart below, the Conference Board’s Global Consumer Confidence Index recently reached its highest level in the last 15 years.

Bringing it all together, it appears that there is both the ability (excess savings) and willingness (consumer confidence) for consumers to unleash this pent-up demand. This is a powerful combination and we believe it will provide a very important driver for the global economy, corporate earnings, and global equity markets.

Have a good weekend,


Climbing The Wall of Worry

Phil D’Iorio

Global equity markets have been volatile over the last week with stocks meandering back and forth between positive and negative territory. After a huge run in the stock market over the last year, it is reasonable to expect a period of consolidation although the timing of this is uncertain. As seen in the chart below, the average annual drawdown from peak to trough was 14.2% over the last 40 years.

Over the last year the stock market has done a very fine job of climbing the so-called wall of worry. Going forward, the market will have to continue to do so because there is always a of list of worries for investors to fret about. At the current moment, the list of concerns includes rising interest rates, a spike in COVID cases, inflationary pressures, and a likely tax hike for U.S. Corporations. In addition, there are numerous signs of speculation including margin debt at all-time highs, investment sentiment readings showing extreme levels of optimism, and companies with no earnings finding their way into the public markets using SPAC’s (Special Purpose Acquisition Corporations). What should a rational investor do in the current environment? We will revisit this question in a moment. But first, let us consider what the experts are focused on.

In recent months, it appears that market strategists and economists are spending an increasing amount of time trying to make predictions about the U.S. 10-year Treasury Yield, the US dollar, the level of economic growth, and the forthcoming inflation. These predictions are then used to determine ‘the best trades’ for investors such as the decision to be invested in value or growth stocks. We don’t try to make predictions about the 10-year Treasury Yield or the inflation rate, nor do we spend much time thinking about the narrative on growth versus value stocks. We don’t believe it is easy to execute a strategy based on forecasting the twists & turns of the global economy and then re-adjusting the portfolios accordingly. When it comes to the debate on growth versus value, we don’t spend a lot of time thinking about it. One of the key issues with the ongoing debate about growth and value is that the term ‘value’ means different things to different people. This has created confusion over the years. In his 1992 letter to shareholders, Warren Buffet shared some interesting perspectives on the growth versus value debate.

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive. In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value – in the hope that it can soon be sold for a still-higher price – should be labeled speculation.”

So, what should a stock market investor do in the current environment? We don’t believe there is a ‘right’ answer but this is what we are doing. We follow a consistent investment philosophy that has been in place for many years. In a nutshell, we build concentrated portfolios with high quality companies and we use a long-term investment horizon. We are looking for companies that are run by experienced management teams with a history of prudent capital allocation. We invest in corporations that have a competitive advantage or a protective moat around their business. By doing this, we end up with a portfolio full of companies that operate in industries with high barriers to entry. This makes it difficult for new competitors to enter the market and typically allows our companies to earn above average returns on invested capital for extended periods of time. These types of companies typically generate robust free cash flow and can do so across the business cycle. High quality companies tend to hold up well during periods of market weakness given the stability of their earnings. Our portfolios held up well during the market panic of 2020 and we believe they will do so again when the stock market goes through the next phase of market weakness.

Have a good weekend,


2021 First Quarter Global Equities Review

Phil D’Iorio

Despite a bout of volatility that emerged towards the end of the quarter, global equity markets finished the first quarter with positive gains. The advance in the stock market was driven by improving economic conditions and progress with COVID vaccinations. During the quarter, the United States generated some of the strongest gains on the back of two overriding themes – greater than expected stimulus and an accelerated vaccine rollout. During the quarter, the S&P 500 generated a total return of 6.2%. This compares with a total return of 4.9% for the MSCI World Index.

The Return to Normality

Phil D’Iorio

It has been just over one year since COVID-19 was declared a pandemic and since global stock markets formed a bottom last March. It has been a challenging year but there are more and more signs that the global economy is healing and that everyday life is getting closer to normal. A quick look at the economies where vaccinations are furthest along is a good way to gauge the progress on the world’s return to normality.

Oxford Economics has an all-encompassing Recovery Index that incorporates several factors including employment, demand, mobility, and health related factors. As seen in the chart below, the Recovery Index has been improving for several months and it is at the highest level since the pandemic began. The Recovery Index highlighted below is for the United States so it is not a perfect readthrough for the world. Having said that, the United States was one of the hardest hit countries by COVID-19 and it is also one of the furthest along in terms of vaccinations, so the progress being made is encouraging.

Data from Israel also paints an encouraging picture of the impact of extensive vaccinations on Covid cases and hospitalizations. Israel is another one of the countries that is furthest along the vaccination path with more than 60% of its citizens having been vaccinated. As seen in the chart below, cases of Covid and new severely ill hospital patients have plunged since the first week of February. Given that this occurred during a period when social distancing restrictions were eased, it is a promising sign for other countries as vaccinations begin to ramp up around the world.

Another sign that we are on the road to recovery is that corporate share buybacks are now back to pre-COVID levels, suggesting that corporations are feeling good about the future.

Individual investors are also feeling good about the prospects for the future as inflows into stock funds have reached their highest levels in the last 20 years.

It appears that corporations and individual investors are using history as a guide. According to LPL Financial, the second year of a new bull market has historically been positive. As seen in the chart below, the average return for the S&P 500 in the second year of a bull market has been +16.9% over the last 70 years.

Perhaps the best sign that the world is returning to normal is that global GDP is expected to return to its pre-pandemic level during 2021. This will mark one of the quickest economic recoveries ever.

While it is too early to say that we are completely out of the woods, there are more and more signs that the world is making progress against COVID-19 and that we are getting closer towards a state of normality.

Have a good weekend,


A Perspective on Volatility and Valuations

Phil D’Iorio

Global stock market volatility has increased significantly in recent weeks. Volatility is especially apparent in certain parts of the market such as the Technology sector. The Tech-heavy Nasdaq Index has experienced daily swings of 3-4% in recent days. This has caused jitters among investors. Looking back over the last year, global stock markets are up a lot and they are expensive. But should we be selling? This is a question which many of our clients have recently been asking of us.

We agree that the stock market is expensive but it’s not across the board. Some areas of the market offer very attractive valuations such as Financial Services. However, some areas are highly speculative and are reminiscent of the Tech Boom in the late 1990’s. Back then, many stocks got so expensive they were being valued on eyeballs. Earnings didn’t matter back then and we are hearing the same narrative today. But earnings do matter, and perhaps that explains why some of the speculative froth has been taken out of the market. The huge advance in non-profitable Tech companies during 2020 (as seen in the chart below) was bound to have a setback at some point.

While stock market volatility creates anxiety, investors should ask themselves if the price action is surprising or out of the ordinary before hitting the panic button. At this point, the moves in the stock market seem quite rational and do not look out of the ordinary. Looking back in history, it is not unusual for stocks to start pulling back when bond yields begin to rise. It’s also not surprising to see high-flying growth stocks bearing the brunt of the selling pressure. Underneath the surface, it appears as though investors are taking profits on speculative growth stocks and using the proceeds to buy stocks within more cyclical sectors that will benefit from the ongoing global economic recovery. This seems rational.

Over the last several months, there have been some huge downward swings within the speculative corners of the market. Several companies have experienced peak-to-trough declines of 30-50%. Examples include Zoom Video Communications which was down nearly 50%, Peloton -40%, Tesla -35%, Spotify -30%, and Shopify which was down nearly 30%. These declines compare with a pullback of about 5% for the S&P 500 and 3% for the Dow Jones Industrial Average Index.

So, should we be selling?

While the market is expensive and there is ongoing speculation in certain areas of the market – we don’t own the market. We own a concentrated portfolio of highly profitable companies that trade at reasonable valuations. One of the lessons from the bursting of the Dot Com bubble is not to get out of the market when speculative activity surges. Rather, the lesson is to avoid the concept stocks with frothy valuations and to be skeptical of unproven companies that claim they are guaranteed to capitalize on exciting new trends.

So, as we navigate today’s markets, in which speculative activity is surging, we will continue to invest in fundamentally sound companies with a proven track record of profitability and only buy them if we can do so at reasonable valuations.

Have a great weekend,

The implications of rising bond yields for the stock market:

Phil D’Iorio

Global stock market volatility has increased in recent weeks and this was especially apparent yesterday when the MSCI World Index fell by 1.5%. The US markets were even more volatile with a decline of 2.5% in the S&P 500 and a drop of 3.5% in the Tech-heavy Nasdaq Index. One of the key factors driving the increase in volatility is the recent spike in bond yields. As seen in the chart below, the US 10-year Treasury Yield has increased to its highest level since February of 2020.

As equity investors, it’s always important to pay attention to what’s happening in the bond market given its track record of providing valuable information for the economy and the stock market.

Our first observation of the chart above is that although yields have spiked, they are bouncing off a decade-low level. And the reason we reached this depressed level is due to COVID. As we all know, COVID led to lockdowns around the world and the deepest recession since the Great Depression. Although hyperinflation is not a concern of ours, there are many signs that inflation could pick up as the global economy returns to normal. One of the most obvious signals is coming from commodity markets. Copper is especially interesting given its widespread application across most sectors of the economy. Doctor Copper is market lingo for this base metal as market commentators like to joke that copper has a “Ph.D. in economics” given its ability to predict turning points in the global economy. Copper is used extensively across various sectors of the economy including homes, factories, electronics, and power generation & transmission. As a result of this, demand for copper is often viewed as a reliable leading indicator of economic health and this demand is typically reflected in the market price of copper.

At a recent price of $4.26, copper is back to levels not seen in a decade, as seen in the chart below.

Source: www.macrotrends.net

And it’s not just copper that has made a comeback. There has been a significant price move across the commodities spectrum including iron ore, oil, and nickel. From our perspective, the move in commodities is a sign that the global economy is recovering from the COVID downturn. The recent rise in bond yields is another sign that the global economy is normalizing. Given the recent upward move in yields, investors are now wondering if higher interest rates are bad for stocks. This is a legitimate concern given the recent move in bond yields and the expectation that yields will continue to move higher as the global economy recovers from COVID. If stock market history can be used as a guide, equity market investors should not be too concerned about higher interest rates. Over the last 30 years, the S&P 500 has performed better when interest rates are increasing, as seen in the chart below.

BMO Capital Markets recently analyzed various interest rate cycles over the last 30 years and determined that low levels of interest rates are not necessarily the best environment for US stock market performance. For example, the S&P 500 has generated stronger average returns at higher levels of interest rates compared to lower levels of interest rates. This makes sense because low-rate environments are usually the result of sluggish economic growth. What the analysis shows is that rising interest rates have been good for US stock market performance, especially when rising rates are occurring off a low base as they are today.

Over the last 30 years the S&P 500 has posted an average price return of 14.2% during periods of increasing rates. This compares to an average price return of 6.4% during periods of falling rates as seen in the chart below.

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, FRB

In summary, the recent spike in bond yields has led to an increase in market volatility. However, this pullback should be taken in the context of global stock market indexes that have surged by approximately 70% from the lows in March of 2020. Market pullbacks or market corrections are inevitable given that they happen every year, even during strong bull markets. As we all know, stock markets do not go up in a straight line. While it’s not enjoyable to see a decline in the value of our investments, these stock market sell-offs typically generate attractive buying opportunities. And that’s where our efforts will be focused so that we can take advantage of these opportunities as they are come our way.

Have a great weekend,

Fourth Quarter Earnings are Plentiful

Phil D’Iorio

Our recent commentary focused on potential bubbles in the market. Now it’s time to focus on what really matters for equity markets, which is the earnings being generated from companies that actually make money. While Q4 earnings season isn’t officially over, there are some very positive signs for investors.

The corporate earnings recovery has been substantially more robust than anyone could have imagined when the pandemic started to unfold about one year ago. Since the COVID crisis began, quarterly earnings have declined on a year-over-year basis throughout 2020. However, on the back of central bank liquidity and government stimulus, earnings growth has turned positive in the fourth quarter. Nearly 85% of S&P 500 companies have reported fourth quarter results thus far. And the results have been nothing short of spectacular. Earnings have surpassed estimates by approximately 17.0% in aggregate, with nearly 80% of companies beating their projections as seen in the chart below.

If the current pace continues, Q4 2020 will end up being the second best quarter in terms of positive EPS surprises since FactSet began tracking this metric in 2008. It is important to note that the United States isn’t the only region experiencing robust earnings growth. What we have been observing is broad based strength in corporate earnings across the world. As seen in the chart below, earnings have been surprising on the upside in Europe, Japan, and the emerging markets.

Positive earnings surprises are great to see, but what is even more powerful is when we see positive earnings surprises combined with positive earnings revisions for the future. And that’s exactly what is happening. As seen in the chart below, US corporate earnings revisions have been so strong that we are essentially getting a V-shaped earnings recovery.

Source: Bloomberg

Earnings revisions have also been strong around the world. As seen in the chart below, global earnings revisions are near the strongest levels going back over 25 years.

So corporate earnings look solid. And there is also some encouraging news on the COVID front as well. While the data isn’t perfect, recent figures suggest that Canadian and US case counts have fallen by approximately 60% from their peak.

Source: John Aitkens

The US has vaccinated about 10% of the overall population. More importantly the highest risk cohorts are getting vaccinated at a rapid pace. With approximately 42% of the 75+ year-old cohort and 24% of the 65-74 age population having already received their first dose, we should start to see mortality rates and hospitalizations plummet. While the vaccine roll-out has been disappointing in other countries (including Canada), the key takeaway is how fast the projected vaccination rates can improve once supply and logistical constraints are overcome. Chile is a case in point. The country was one of the early vaccinators but initially only had limited access to supply of the Pfizer vaccine. This meant it would only be able vaccinate 9% of its population in 2021. It then received 4 million doses of Sinovac and its vaccination run-rate is suddenly the 4th fastest in the world! Good things are happening with earnings and the fight against COVID is progressing. We’ll take it.

Have a great long weekend.