Americas CIO View

Very strong first-quarter EPS results: 200 U.S. dollars annualized S&P 500 EPS power

S&P 500 companies delivered stellar first-quarter profits far beyond street and our estimates

428 companies comprising 90% of the index earnings have reported 86% beat on earnings per share (EPS) and 13% missed (the rest is in line) with an aggregate whopping 24.8% surprise. 65% beat on sales and 15% missed with an aggregate 4.4% surprise. Bottom-up first-quarter EPS is 49.20 U.S. dollars, far beyond the 40 U.S. dollars consensus and our 44 U.S. dollar estimate at the beginning of the earnings season. Best earnings growth at secular growth sectors Tech and Communication Services and the recovery leading sectors Consumer Discretionary and Financials. Tech had the strongest sales growth, followed by Consumer Discretionary and Communication Services. Industrials and Real Estate still have year-over-year sales declines and next to zero EPS growth.

We raise our 2021E and 2022E S&P 500 EPS by 25 U.S. dollars to 200 U.S. dollars and 215 U.S. dollars

Much stronger than expected first-quarter earnings results give us confidence to boost our 2021 and 2022 S&P 500 EPS estimates by 25 U.S. dollars and 24 U.S. dollars, respectively. Biggest boost is at Financials, Tech, Communication Services, Consumer Discretionary and Energy. Out of the 25 U.S. dollars boost to 2021E S&P 500 EPS, 20 U.S. dollars is at these five sectors: 7.80 U.S. dollars at Financials, 5.40 U.S. dollars at Tech, 2.80 U.S. dollars at Communication Services, 2.50 U.S. dollars at Energy and 1.70 U.S. dollars at Consumer Discretionary. Tech and Communication Services likely continue robust secular growth given the flourishing digital economy. Financials helped by lower credit costs, strong capital markets and likely rising interest rates and better loan growth to come. Consumer Discretionary supported by the return of consumer services and oil over 60 U.S. dollars per barrel supports a profitable Energy sector.
Our 2021E S&P 500 EPS by quarter is now: $49 + $50 + $50 + $51 = $200

Proposed U.S. corporate tax rate hike likely hits S&P 500 EPS by 7% in 2022

The proposed U.S. corporate tax rate hike from 21% to 28% would hit S&P 500 EPS by 7%. Thus, our 2022E (estimated) S&P 500 EPS of 215 U.S. dollars before the effect of tax hikes would be about 200 U.S. dollars with tax hikes. A change in the U.S. statutory rate will have a greater effect on companies with high domestic profits and lesser effect on those with high foreign profits. But it remains to be seen how attempts to tax foreign profits develop now that the United States has a territorial system. Higher minimum global intangible low-taxed income tax (GILTI) rates are possible, but this is complicated in reality. We think some further foreign profit tax capture occurs, but a hike in the U.S. rate will fall mostly on firms with a high domestic share of profits. We think the Energy sector likely loses many deductions; government royalties/credits, federal/state and foreign are in the tax provision.

Higher capital gains tax risk looms over highly appreciated assets

If new spending and tax legislation is achieved through reconciliation, we would expect a jump in the highest capital gains tax rate to possibly 43.4% from 23.8%. Partisan legislation might also lead to changes in cost-basis treatment of equities when inherited. It is uncertain where the top rates and the thresholds might go, but some investors might look to lock in gains at current capital gains tax rates by selling in advance of new legislation. Such sales could be very quick sells and repurchases, but some investors might wait to repurchase or set aside some sale proceeds to pay their triggered tax liability. We acknowledge this near-term risk to growth stocks that have appreciated tremendously in recent years, but we think it is mostly offset by the substantial EPS growth occurring and still negative real interest rates.

We raise Consumer Discretionary to equal weight and lower Consumer Staples to equal weight

Consumer Discretionary first-quarter earnings surprised to the upside the most and delivered the strongest year-over-year growth among all sectors, albeit on a depressed first quarter 2020 base. Earnings at many industries rebounded powerfully on strong goods demand, including Household Durables, Internet Retail, and parts of Specialty Retail. It is mixed at Apparel Luxury Goods, Restaurants, Hotels & Leisure, all yet to recover, but we expect they will.

We take a more industry specific strategy within the two Consumer Sectors, aiming for a balance of reasonably valued recovery plays and reasonably valued, high quality bond substitutes. We are selective with Retailers given the shift to the internet shopping and consumers finding more reliably available merchandise and variety, price value and shopping convenience at the big box stores over many smaller/specialty chains. We remain over-weight Beverages, Household and Personal Products and equal–weight (EW) the rest of Staples. We are now over-weight Hotels, Restaurants, Leisure and Apparel/ Luxury Goods and equal-weight the rest, but still under-weight Auto and point to a foreign producer preference.

We raise Consumer Discretionary from UW and lower Consumer Staples from overweight (OW), both to EW. We continue to OW Tech, Communication Services, Health Care and Utilities. We underweight (UW) Energy, Industrials, Materials and Real Estate.



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