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Phil D'Iorio / February 12, 2021

Fourth Quarter Earnings are Plentiful

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.
Phil

*Cumberland and Cumberland Private Wealth refer to Cumberland Private Wealth Management Inc. (CPWM) and Cumberland Investment Counsel Inc. (CIC). NCM Asset Management Ltd. (NCM) is the Investment Fund Manager and CIC is the sub-advisor to the Kipling and NCM Funds. CIC is also the sub-advisor to certain CPWM investment mandates. This communication is for informational purposes only and is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. Reasonable efforts have been made to ensure that the information contained herein is accurate, complete and up to date, however, the information is subject to change without notice. Information obtained from third parties is believed to be reliable but no representation or warranty, express or implied, is made by the author, CPWM or CIC as to its accuracy or completeness. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involved inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. Past performance does not guarantee future results. CPWM and CIC may engage in trading strategies or hold long or short positions in any of the securities discussed in this communication and may alter such trading strategies or unwind such positions at any time without notice or liability. CPWM, CIC and NCM are under the common ownership of Cumberland Partners Ltd