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Tuesday, May 4, 2021

Price targets and financial forecasts fall behind

Readers of the Morning Brief know investor expectations were high forward of earnings season, that companies have topped expectations at a record rate, and that the economy is firing on all cylinders

And these occasions have pushed Wall Street strategists again into one other theme we have written about on this area for the previous couple of months — trying to keep up with the market

Late final week, Credit Suisse chief fairness strategist Jonathan Golub raised his value goal for the S&P 500 to 4,600 from 4,300, writing {that a} “red hot economy” is fueling company earnings beats.

“Consensus GDP forecasts call for 6.3% real (8.6% nominal) growth in 2021, the fastest pace in nearly 4 decades,” Golub writes. “Every 1% improvement in nominal GDP translates to a 2.5%-3% gain in S&P 500 revenues, and additional improvement in margins, as fixed expenses are amortized over greater sales volumes. While companies might bemoan higher input costs, history shows that rising commodity prices lead to margin upside as companies pass on additional costs.” (Emphasis ours.)

Golub additionally cites working leverage — which we covered earlier this year — each as a driver for company earnings this cycle and an element nonetheless under-appreciated by buyers. Most merely acknowledged, working leverage is the skill for firms to earn incremental earnings on larger gross sales. And so if, for instance, each greenback of gross sales price an organization 50 cents, a agency exhibiting excessive working leverage would see decrease prices on extra income, leading to its backside line rising at a quicker charge than gross sales.

At the starting of financial cycles, Golub notes that higher-than-anticipated working leverage leads to constant upward revisions to earnings forecasts for probably two or three years. Seen this fashion, the robust earnings cycle popping out of the pandemic-induced recession is just simply getting began.

And whereas Golub’s work definitely frames the financial system’s power as an upward driver for markets, we would be remiss not to mention recent work covered by the Morning Brief from Goldman Sachs and Deutsche Bank suggesting that financial progress is peaking, a probably troubling signal for shares. 

Moreover, whereas faster-than-expected financial progress is an effective downside to have, it appears some elements of the financial system are reaching their limits. A dynamic that appears more likely to both gradual progress, drive inflation, or each. On Monday, the latest data on manufacturing activity from the Institute for Supply Management confirmed the manufacturing sector grew at a slower tempo than anticipated in April as lead instances elevated, costs rose, and labor and commodity shortages endured.

“Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” stated Tim Fiore, chair of Institute for Supply Management manufacturing enterprise survey. “Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

By Myles Udland is a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

What to observe right this moment

Economy

  • 8:30 a.m. ET: Trade stability, March (-$74.Three billion anticipated, -$71.1 billion in February)

  • 10:00 a.m. ET: Factory orders, March (1.3% anticipated, -0.8% in February)

  • 10:00 a.m. ET: Durable items orders, March remaining (0.5% in prior print)

  • 10:00 a.m. ET: Durable items orders excluding transportation, March remaining (1.6% in prior print)

  • 10:00 a.m. ET: Non-defense capital items orders excluding plane, March remaining (0.9% in prior print)

  • 10:00 a.m. ET: Non-defense capital items orders shipments excluding plane, March remaining (1.3% in prior print)

Earnings

Pre-market

  • 6:30 a.m. ET: CVS Health (CVS) is predicted to report adjusted earnings of $1.71 per share on income of $68.46 billion

  • 6:40 a.m. ET: Marathon Petroleum (MPC) is predicted to report adjusted losses of 71 cents per share on income of $18.91 billion

  • 6:45 a.m. ET: Pfizer (PFE) is predicted to report adjusted earnings of 78 cents per share on income of $13.71 billion

  • 6:55 a.m. ET: Under Armour (UAA) is predicted to reported adjusted earnings of Four cents per share on income of $1.13 billion 

  • 7:00 a.m. ET: ConocoPhillips (COP) is predicted to report adjusted earnings of 54 cents per share on income of $8.38 billion 

  • 7:00 a.m. ET: Apollo Global Management (APO) is predicted to report adjusted earnings of 59 cents per share on income of $550.57 million 

  • 7:30 a.m. ET: Dominion Energy (D) is predicted to report adjusted earnings of $1.08 per share on income of $4.21 billion

  • 7:30 a.m. ET: Warner Music Group (WMG) is predicted to report adjusted earnings of 15 cents per share on income of $1.18 billion

Post-market

  • 4:00 p.m. ET: Caesars Entertainment (CZR) is predicted to report adjusted losses of $1.70 per share on income of $1.7 billion

  • 4:05 p.m. ET: T-Mobile (TMUS) is predicted to report adjusted earnings of 58 cents per share on income of $18.92 billion 

  • 4:05 p.m. ET: Virgin Galactic Holdings (SPCE) is predicted to report adjusted losses of 29 cents per share on income of $500,000

  • 4:05 p.m. ET: Zillow Group (ZG) is predicted to report adjusted earnings of 26 cents per share on income of $1.10 billion

  • 4:05 p.m. ET: Activision Blizzard (ATVI) is predicted to report adjusted earnings of 71 cents per share on income of $1.79 billion

  • 4:10 p.m. ET: Match Group (MTCH) is predicted to report adjusted earnings of 39 cents per share on income of $650.75 million

  • 4:10 p.m. ET: Lyft (LYFT) is predicted to report adjusted losses of 53 cents per share on income of $557.33 million

  • 4:10 p.m. ET: McAfee Corp (MCFE) is predicted to report adjusted earnings of 36 cents per share on income of $732.29 million

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