A knockout corporate earnings season for the US stockmarket

USA Inc is vastly exceeding expectations. First-quarter earnings reported as of last Friday had beaten analysts’ forecasts by a mammoth 30%; usually “earnings beats” are about 3%-6%, says Bob Pisani for CNBC. The unprecedented uncertainty triggered by the pandemic caused many blue-chip firms to withdraw their guidance last year. That prompted the analysts who study these firms to make very conservative forecasts for the earnings outlook, which were widely thought to be too pessimistic. Most people expected this quarter’s earnings to be good, “but this is really good”.  

US stockmarket valuations are historically high on a cyclically adjusted price/earnings ratio (Cape) of 34.6, according to Mebane Faber of Cambria Investment Management. Strong earnings are one way of bringing those valuations down to a more reasonable level. Bank earnings have been especially impressive, says The Economist. JPMorgan Chase reported record revenue in the first three months of the year. Profits have tripled in a year at Citigroup and doubled at Bank of America. For the first time since 2008 banks are reporting returns on equity above 20%. They have profited from the first quarter-market frenzy, which saw massive trading by ordinary retail investors and frenetic activity on the mergers front. Goldman Sachs enjoyed a 40% yearly jump in its advisory fees.

Consumer-facing and bank stocks have delivered “stellar” earnings, but their stocks have not enjoyed a big boost, says Jon Sindreu in The Wall Street Journal. The KBW Bank index actually fell last week. Investors are starting to fret that the cheap stocks they loaded up on to benefit from economic reopening are the most vulnerable to rising prices. They are now buying “quality” – firms with low debt and cash reserves – instead.