It was a great Q2 2021 earnings reporting season, as anticipated, with U.S. firms as a whole beating estimates by 19% (versus a 2% average beat over the period of 2000-2019). From this point forward, the hurdles get higher.
Supply chain issues, inflation, labor problems, and consumer sentiment are all trending negative, and causing some analysts to revise economic growth estimates down for 2022.
Most significantly, perhaps, tax hikes are coming into view. Significant corporate tax increases would be even more of a negative for U.S. companies, and could make any growth pickup at all a wash in terms of earnings. As stock markets begin to price in a 2022 without significant earnings growth — predicated perhaps on tax news — that could prove hard to digest for stocks selling at historically high valuations.
Jerome Powell seems to have been successful in convincing markets that a ratcheting back in asset purchases is not hawkish, when coupled with reassurances that a liftoff in rates remains much further off, and what was feared as a Jackson Hole correction catalyst instead proved to be a catalyst for yet more all-time-highs.
All of these crosscurrents are navigable, and our research continues to point us in the direction of sustainable growth stories at a reasonable price (with “reasonable” acquiring flexibility appropriate to the underlying policy regime), particularly in tech, biotech, software, business digitization, networking, fintech, alternative energy, and cybersecurity, as well as commodities that are benefitting from technology-related trends such as copper and lithium.
Digital assets remain interesting, with Ethereum for now decoupling from bitcoin, perhaps on the basis of DeFi and a new NFT frenzy. The “big two,” bitcoin and ether, remain our favorites among decentralized cryptos, but our preference has been to be a buyer on declines rather than to chase spikes.
We want to reiterate that more volatility could easily lie ahead from any number of political, geopolitical, financial, economic, or public health sources. When it comes, we believe it will be an opportunity to establish or increase exposure to the enduring themes that we discuss in these weekly letters.
Thanks for listening; we welcome your calls and questions.
