| | | | | | | Presented By Northern Trust | | | | Axios Markets | | By Sam Ro ·Jul 26, 2021 | | Today's newsletter is 1,194 words, 4.5 minutes. 📈 of the day: 1.7%, the average gain in the S&P 500 between the Olympics' opening and closing ceremonies since 1928, according to Bespoke Investment Group. | | | | | | 1 big thing: Companies clear an already high bar |  | | | Illustration: Aïda Amer/Axios | | | | Companies have been reporting earnings growth that's way up — even overshooting expectations put out by Wall Street's analysts. Why it matters: Earnings growth is the key driver of stock prices. - Going into earnings season, companies had signaled to analysts that earnings would be stronger than what analysts were forecasting, forcing those analysts to revise up their already high estimates.
- The fact that stock prices have been trading near all-time highs suggests a lot of optimism for future earnings had already been priced into the market.
By the numbers: Through Friday, 24% of S&P 500 companies reported Q2 2021 quarterly financial results, according to FactSet. - Of those companies, a whopping 88% have reported better-than-expected earnings. If the trend continues, it would be the highest percentage of quarterly beats since FactSet started tracking this data in 2008.
- Altogether, these companies on average have reported earnings that are 19% above what analysts had forecast, which is above the five-year average, a 7.8% beat.
- At this pace, S&P 500 companies will have reported earnings growth of 74.2% year over year, which would be the highest growth rate since Q4 2009.
The big picture: What makes this performance notable is that it occurred during a time when inflation heated up by more than what economists were expecting, and executives had been warning about it. What they're saying: "I'm not surprised by the strong earnings results; it's in keeping with high expectations supported by massive stimulus," Principal Global Investors chief strategist Seema Shah tells Axios. - "It's possible, however, that Q2 will mark both peak recovery for the U.S. economy and earnings improvement expectations. The outlook for the second half of 2021 appears more complicated, given concerns over economic momentum and inflationary forces."
What to watch: A third of S&P 500 companies are announcing earnings this week. Big names providing results include tech giants Apple, Microsoft, Alphabet, Amazon and Facebook. The bottom line: Just because expectations for earnings seem high doesn't mean companies can't beat them. Analysts are giving their best estimates in a turbulent time, and companies are doing their best not to disappoint. |     | | | | | | 2. Catch up quick | | China announced new strict rules on the $120 billion private tutoring industry, sending shares of for-profit Chinese education companies sharply lower. (Reuters) Bitcoin surged and topped $39,000 for the first time since mid-June amid speculation that Amazon was embracing cryptocurrencies. (Yahoo Finance) The Olympic Games opening ceremony attracted its lowest TV audience in 33 years. (Axios) | | | | | | | | 3. Mortgage refinance wave coming |  Data: Freddie Mac; Chart: Axios Visuals Mortgage rates are falling back to historic lows, which means homeowners are getting another opportunity to refinance their debt at a lower cost. Why it matters: For many Americans, mortgage payments represent their biggest monthly outflow of cash. Refinancing at a lower rate reduces that burden, and potentially means more capacity to spend, which in turn stimulates the economy. By the numbers: As of July 22, the 30-year fixed-rate mortgage averaged 2.78%, according to Freddie Mac. This is down from 2.88% a week ago. - It's the lowest level since Feb. 11.
- This rate is below the effective average rate of all mortgage debt outstanding, according to data cited by Renaissance Macro Research.
Yes, but: Mortgage Bankers Association chief economist Mike Fratantoni tells Axios that while mortgage rates are very low, they were slightly lower late last year. And so those who refinanced then have no incentive to refinance now. - "They're not a customer right now because rates are a half a point higher," he said.
But, but, but: The Federal Housing Finance Agency recently announced an end to the 0.5% mortgage refinance fee implemented during the pandemic. - While these savings may not bring back those who refinanced when rates were at rock bottom, they'll certainly help attract those who still pay more for their mortgage than today's rates.
The bottom line: "With mortgage rates falling again to near record lows, combined with the removal of the adverse market fee effective August 1st, we will likely see another increase in refinance activity from already elevated levels," Bill McBride, housing economist at Calculated Risk, tells Axios. | | | | | | | | A message from Northern Trust | | How investors can navigate a changing tax environment | | |  | | | | The prospect of higher tax rates has investors rightfully concerned about their bottom line. A new report from The Northern Trust Institute explores how to address unrealized gains in your portfolio and implement other tax-efficient investing strategies. Learn more. | | | | | | 4. Profit margins are holding up |  Data: NABE: Chart: Axios Visuals Businesses haven't been this positive about their profit margins in a long time. Why it matters: We've been hearing a lot about cost inflation and rising wages. All other things being equal, these forces should be negative for profitability. What they're saying: A net 35% of professionals working for private-sector firms or trade groups said corporate profit margins expanded in the second quarter, according to a new survey from the National Association of Business Economics. - This was a record high in the survey's 39-year history. Just 7% of respondents said margins were falling while 42% said margins were rising.
- "Inflation, while increasing, is still very low, and according to the survey, many firms, especially in the goods-producing and the [transportation, utilities, information, and communications] sectors, expect increases in costs to be temporary," NABE Business Conditions Survey chair Eugenio Aleman tells Axios.
- "Thus, this could be influencing the response from survey participants that profits will continue to remain high in the near future."
Between the lines: These findings seem surprising, especially with all those reports of executives sounding the alarm on inflation. - Still, many of those same reports note that executives were planning to pass rising costs to their customers through price increases.
- Indeed, 33% of respondents to NABE's survey said prices charged were rising while just 5% said prices were falling.
- For the next three months, 43% said they expected prices to rise with just 1% expecting prices to fall.
The bottom line: Be wary of when companies and executives voice concerns about inflation. While it may sound like a problem for businesses, they'll do whatever they can to preserve profits, even if it means making their customers pay for it. | | | | | | | | 5. Here come Tesla earnings |  Data: FactSet; Chart: Will Chase/Axios Tesla is expected to report an eighth consecutive quarterly profit after markets close today, but still faces big questions despite showing it's now consistently in the black, Axios Generate author Ben Geman writes. Why it matters: The company dominates U.S. electric car sales. With a market cap of $620 billion, it's the seventh biggest company in the S&P 500. - Shares went from about $50 (on a split-adjusted basis) two years ago to as high as $900 on Jan. 25, making it one of history's most impressive growth stock stories.
- However, the stock has since struggled, closing at $643 on Friday.
By the numbers: FactSet estimates the Silicon Valley automaker, solar and storage provider to report adjusted earnings of 94 cents per share and sales of $11.53 billion. What to watch: Here are a few questions Tesla and its CEO Elon Musk will answer. - How much will Tesla earn from actually selling cars? In Q1 Tesla again brought in plenty of money — $518 million — from selling regulatory emissions credits to automakers that primarily sell gas-powered cars.
- What's going on with the Supercharger network? CEO Elon Musk tweeted last week that Tesla would make the network, currently open only to Teslas, available to other EVs later this year. But he provided no details beyond noting that it will extend to all countries "over time."
- What's bitcoin's status with Tesla? Musk told a virtual conference last week that Tesla would "most likely" resume accepting the digital currency as payment.
Go deeper | | | | | | | | A message from Northern Trust | | How to prepare your portfolio for tax reform | | |  | | | | Prepare your portfolio and wealth plan for change with research-based insights on the likelihood of proposed tax policy changes and cutting-edge wealth planning strategies for managing complex wealth from The Northern Trust Institute. Ready for reform? | | |  | | It'll help you deliver employee communications more effectively. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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