This week, CIO Tom Weary, CFA®️, goes over the latest news on the rapidly improving economy, with consumer confidence, the labor market, and several sectors showing vast improvements. He also shares blockbuster earnings from the five mega-cap tech titans and many other companies.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week we had earnings reports from each of the five Mecap Tech Titans, as well as a slew of other companies during the biggest week of quarterly reporting.  But first, let’s begin by getting the latest update on the economy, which is now back to just 1% below its pre-pandemic level.

In short, the U.S. economy is improving rapidly and the Fed is moving slowly.  Capital investment by businesses as measured by Capital Goods Orders Nondefense ex Aircraft turned up in March after a disappointing drop the prior month, as we see in this first chart.  And while that was below estimates, as we can see in this second chart the absolute level of spending is reaching record levels, which is a good sign for future growth and productivity.  Turning to the consumer, we can see in this next chart that confidence has rebounded sharply recently, nearing pre-pandemic levels.  As we know, consumer confidence is often driven by employment prospects, and we can see in this next chart that the Labor Differential, which measures the difference between the number of people saying jobs are easy to get and those saying jobs are hard to get, has also shot back up to near pre-pandemic levels.  This makes sense given, as we see in this next chart, that job postings are now 22% above where they were before the pandemic hit.  The labor market is looking much stronger suddenly.  In fact, this next chart implies that we are in the midst of the economic surge right now as first quarter GDP growth came in at 6.4% and with economists projecting the second quarter’s GDP growth to hit an amazing 8.1%.  It also projects that things will slow down after this surge and return to pretty mediocre growth by the end of next year.  This is probably why the Fed is being so patient, sitting on their hands at this week’s meeting, because they believe that any signs of inflation are just transitory, just as the economic rebound will prove to be.  This explains why interest rates are relatively stable, as we see in this next chart of the yield curve, with movement limited to the medium term which is sensitive to better economic growth while the long end which is more sensitive to inflation concerns is not moving.  This is pretty amazing given how much liquidity has flooded the system, as we can see in this last chart showing the M2 money supply.  All the stops were pulled to fight this pandemic, and it isn’t over yet.

On Tuesday, Microsoft reported results after the close that crushed expectations, with quarterly earnings of over $15 billion, or $1.95 per share versus $1.40 a year ago and estimates of $1.78.  Revenue was nearly $42 billion, up from $33 billion last year.  Sales for Azure, Microsoft’s cloud computing product, grew 50% in the quarter.  CEO Satya Nadella stated, “Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning”.  Apple smashed sales estimates on a surge in demand for its devices with revenue of $89.6 billion up an astonishing 54%.  This led to profits of $1.40 per share, way above Wall Street estimates for 98 cents.  The company boosted its dividend 7% and increased its share repurchase program by $90 billion.  Apple had record revenue in each geographic segment and double-digit growth in each product category.  Wow!  NXP Semiconductors, a Defensive Portfolio holding, reported earnings of $1.25 which beat by 4 cents on sales of $2.5 billion which rose 27% from a year ago and beat by $10 million.  Automotive revenue was up 3% on the quarter and 24% from last year to $1.2 billion despite the ongoing global chip shortage.

Alphabet, Google’s parent company, reported blockbuster results with net income of nearly $18 billion, or $26.29 per share, compared to $6.8 billion, or $9.87 a share, in the year-ago quarter.  Revenue grew from $33.7 billion to $45.6 billion, beating estimates by over $3 billion.  Search was the big breadwinner, again, with $31.9 billion in sales, compared with $24.5 billion in the same quarter a year ago. YouTube ad sales jumped 49% year-over-year to $6 billion.  Google’s Cloud revenue improved 46% to $4 billion, though the division lags behind rivals Amazon.com and Microsoft.    Facebook reported blockbuster results with revenue of over $26 billion rising 48% from a year ago and beating estimates by $2.5 billion while earnings of $3.30 per share blew past estimates by 96 cents.  The company reported that they have nearly 3 billion Monthly Active Users.  Think about that number.  That’s approaching half the people on the planet.  Comcast, the cable TV giant and NBCUniversal parent, beat estimates by 17 cents a share, with quarterly earnings of 76 cents per share. Revenue also topped estimates, driven in part by strong growth in broadband and wireless phone customers.  And Peacock streaming subscribers reached 42 million from zero not too long ago.

Amazon reported another blowout quarter with earnings of $15.79 more than tripling from a year ago and versus expectations for only $9.69 as revenues soared to $108.5 billion, $4 billion higher than analysts’ estimates.  Amazon Web Services, the real profit driver, also beat expectations for sales and earnings, sending shares to a new record high after hours on Thursday.  Turning to toys, Hasbro reported earnings of $1.00 which more than doubled from last year and beat estimates by 36 cents even as revenues were flat from a year ago.  Looking ahead, Hasbro is targeting full-year double digit revenue growth.  Sony posted strong results with revenue rising 9% and operating income up 15% from a year ago.  Although Ford reported strong results with Automotive Revenue rising 7% to $33.6 billion and earnings of 89 cents crushing Wall Street estimates by 68 cents, investors were disappointed by a lowered outlook.  The global chip shortage is costing Ford $2.5 billion and forcing them to cut second quarter production by 50%.  Ouch!

Otis Worldwide, the leading elevator manufacturer, beat on both the top and bottom lines with revenue of $3.4 billion rising 15% and beating by $250 million with earnings of 72 cents beating by a dime.  Full year earnings growth is expected to be in the range of 10 to 13%, the dividend was increased 20% and the company added $200 million to the share repurchase program.   Former corporate sibling Carrier Global, a leading HVAC manufacturer, saw revenue rise 21% to $4.7 billion beating by $329 million and earnings of 48 cents beat by 11 cents leading the company to raise their sales growth outlook for the year from 7% to 10%.  Former parent company Raytheon Technologies, a leader in aerospace and defense, also reported strong results, with earnings of 90 cents beating by 7 cents on revenue of over $15 billion which rose 34%.  One year after the transformational merger and three-way split, the company demonstrated its confidence by raising the dividend 7% and expanding its share repurchase program.  And General Dynamics, another aerospace defense contractor and Defensive Portfolio holding, beat on the top and bottom lines with revenue of $9.4 billion rising over 7% from last year and beating by $490 million as earnings of $2.48 beat estimates by 18 cents.  The company has good visibility with their backlog up 4.5% from a year ago to $89.6 billion.

In other earnings news, Mondelez, the maker of Oreo cookies and other snack foods, beat on both the top and bottom lines with sales rising 8% to $7.2 billion and earnings of 77 cents versus 51 cents a year ago and estimates of 69 cents.  Chief Executive Dirk Van de Put said in a statement. “We saw continued improvement across emerging markets, healthy demand in developed markets and another quarter of strong share performance.”  A pandemic-induced drop in medical office visits was among the key reasons for Merck’s earnings shortfall for the first quarter. Merck missed by 23 cents with adjusted quarterly profit of $1.40 per share.  Swiss pharmaceutical giant Novartis disappointed with both sales and earnings missing analysts’ estimates.  Sales of $12.4 billion rose by only 1% and missed by $50 million while earnings of 91 cents were down 5% from a year ago.  And insurer Chubb bounced back with earnings of $5.07 up from 55 cents a year ago.  Core earnings of $2.52 beat estimates for $2.47 as premiums rose 8% to $8.7 billion.  CEO Evan Greenberg pointed out that even with an active quarter for natural catastrophes the company had a profitable underwriting quarter, a rarity in the world of property and casualty insurance where most insurers rely on investment income to make a profit.

So, what does it all mean?  The economy is suddenly booming thanks to historic monetary and fiscal stimulus as well as progress in vaccinating the populace.  Many of your companies are reporting record results.  With roughly half of S&P 500 companies having reported, 90% have beaten earnings estimates, 70% have topped revenue estimates and it looks like quarterly profits will hit an all-time record, rising 125% from depressed levels a year ago.  You will recall that we highlighted cloud computing as an important investment theme, and as you can see by this last chart that the three leaders in the field, all Core Portfolio holdings, are each approaching market values of $2 trillion.  That’s trillion with a T.  These are interesting times, things change rapidly, and we will stay on top of the latest developments for you.  So, please, sit back, relax, and join us again next week for the RFA Weekly Market Update.

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