Growth Tops Expectations
This was an exciting week as the bulk of large technology companies reported earnings, among many other companies. To an overwhelming extent, the revenue and earnings growth are substantially higher than historical norms. For some, this translated into higher stock prices, while for others it meant a near-term selloff. You are probably wondering why some stocks react one way and others react the opposite despite otherwise similar good news. It all comes down to expectations and future guidance. For better or worse, a stock’s price is a function of its future earnings. If management guides those earnings higher, but below analysts’ estimates, it should follow that both enthusiasm for the stock and analysts’ estimates will be reevaluated. Worth noting, sometimes companies try to game the system by offering conservative future guidance with the hope of lowering the bar on expectations. Given our current economic backdrop, it seems likely that some of this gamesmanship is occurring.
The two big stories this week were economic in nature. We learned this week that in the first quarter, the U.S. economy grew at an astounding 6.4%. This not only beat the 4.5% growth in the fourth quarter of last year, but came in slightly ahead of economists’ predictions. As noted last week, the second quarter will likely be the peak of economic growth coming out of the recovery. The second big story was the release of the minutes from the latest FOMC (Federal Reserve) meeting. Investors look to the wording for any indication of potential future policy changes. Now, keep in mind the Federal Reserve is not without its own form of gamesmanship. In that vein, we learned that it will keep “powerful support” until the recovery is complete. It noted the strong housing market isn’t showing the signs of being in a bubble, despite the extraordinary increase in home prices and the limited supply of both new and existing homes. And lastly, it believes it is not time to begin talking about tapering bond purchases, the mechanism by which it artificially controls interest rates.
However, inflation is slowly becoming an issue even if the Federal Reserve continues to want to downplay it. While costs haven’t been passed down to consumers just yet, rest assured it’s coming in the second half of the year. Some quotes from various companies this week include, Stanley Black & Decker which cited increased costs including steel, resin, base metals, electrical components, and batteries pushing up costs in the second half of the year. Others include P&G which says commodity challenges we face are obvious, Honeywell, which said inflation is taking hold and we see it, Kimberly-Clark which lamented sharp rises in input costs, PepsiCo which is seeing higher input inflation, Coca-Cola which is closely monitoring upward pressure on inputs such as high-fructose corn syrup, metals, and other packaging materials, Crown Holdings, Celanese, Boston Beer, Steel Dynamics, Mattel, Whirlpool, Snap-on, and Dover. This is just a sampling of companies talking about rising input costs. Inflation is coming no matter what the Fed says.
In company news, Apple announced it plans to spend $430B over the next ten years, adding 20,000 jobs, and spending $1B on a North Carolina campus. It also committed to increasing its existing share buyback plan by $90B. Delta reported it will receive $3.1B from the Federal government for payroll support, of which $2.2B is a Federal grant. This is the third round of Federal handouts for the airline, and hopefully the last. As for earnings announcements, let me give you an example of what’s been reported. Remember, these numbers are year-over-year comparisons with those just prior to the pandemic and the shutdown. The following are revenue growth numbers: Tesla +73.5%, NXP Semiconductors +27%, Google +34.4%, Microsoft +19.1%, Starbucks +11.2%, Qualcomm +52.7%, Apple +53.7%, and Amazon +43.7%. We anticipate the current quarter will look even better given the comparisons to those at the start of the economic shutdown in the second quarter of last year.
In closing, I turn to the issue of taxes. No, I am not prepared to discuss Biden’s tax proposal which will likely change quite a bit in the coming months. Instead, I wanted to mention that while no one likes paying taxes, it seems some do have it considerably worse than others. And as bad as you have it, this one probably takes the cake. The family of Samsung Electronics' late chairman announced it will be paying off a massive inheritance tax bill of more than 12 trillion Korean won (about $10.75 billion). The inheritance tax payment is one of the largest in history and is equivalent to three to four times the Korean government’s total estate tax revenue last year. At the time of his death, Lee’s estate was valued at $23.4B dollars. Now you know.
Bruce J. Mason, MBA