Report cards are in!  Progress towards educational objectives can be measured by the report cards of individual students. Poor report cards would suggest adjustments are needed in certain areas, while positive report cards would suggest objectives are being met. In the financial world, companies are to pupils as the class is to the economy. Hence, examination of quarterly report cards offers a glimpse into economic progress.

“Earnings season” is when companies report previous quarter’s results. Much attention is placed on these quarterly results for a number of reasons. First, equity investments (stocks) are ownership of a company. Owners want and need a glimpse into how the company performed, as well as if earnings goals were met. This is akin to the progress of an individual student.

Secondarily, examination of aggregate marks offers insight into the economy as a whole. This is akin to the progress of the class. I’m happy to report the class is doing well. As of Friday February 5th, 81% of company announcements beat expectations by a whopping 15.2%1. Both numbers (the breadth and magnitude) far exceed historical norms. Additionally, reports are tracking a 1.7% increase from the prior year1. In other words, companies, in aggregate, are earning more than they did before the pandemic. In general, the class has adjusted to the COVID world and is excelling.

Positive earnings are not pervasive. Certain sectors (energy, industrials, real estate and utilities) continue to struggle. These sectors were troubled with COVID induced challenges and/or intra-industry disturbances. For example, energy companies were dealing with reduced energy demand as well as international antagonism primarily by Saudi Arabia. Additionally, sub-sectors such as travel, leisure and restaurants also have a ways to go. Also, not all companies have released their report cards. Let’s hope the momentum continues.

There is an ongoing debate about how much attention should be placed on quarterly results. Too much focus on quarterly report cards can induce nearsightedness in lieu of strategic achievements. Yet, ignoring near-term results can hinder longer-term wherewithal.

Think of a pharmaceutical company, if too much attention is place on near-term results, multi-year cancer research may be ignored. At the same time, if too much attention is placed on the multi-year cancer research, the pharmaceutical company may not have the financial means to complete the cancer research. Clearly, it is a fine balancing act.

Relative to the economic cycle, earnings as well as a few other data points indicate the early stage of the economic cycle. The above earnings characteristics are typical of early cycle phases. Recent interest rate movements and yield spreads have the credit markets echoing similar sentiments. Pent-up demand is also building. Barring another COVID punch, public inoculation coupled with economic phase progression and the oncoming Spring to relieve cabin fever, 2021 is setting up to be a positive year.

Enjoy your President’s Day weekend. Best regards.