by Gary Alexander

July 7, 2021

The evidence is growing that this market knows no fear. There has been no 5% correction (on a closing basis in the S&P 500) since before the last election, according to James McIntosh, writing in the Wall Street Journal on June 27. The S&P 500 has set seven all-time record highs in a row – the longest streak since 1997. Last Friday also brought new highs to the once-struggling NASDAQ and Dow Industrials.

Starting next week, we will begin hearing from major companies regarding their second-quarter earnings. How good will they be? Very good. Let’s start with what we already know. The broadest measure of U.S. corporate profits is the National Income and Product Accounts (NIPA), including all public and private companies. According to data from the Federal Reserve Bank of St. Louis, released June 24, 2021, year-over-year growth in NIPA after-tax profits is +28.1% from the first quarter of 2020 to the same quarter in 2021. The first quarter also represents a 7% increase over the last quarter of 2020, which is an annualized increase of over 30%. There’s a chance that the rate of increase for the second-quarter 2021 profits will be over 50%, since 2020’s second quarter was so depressed. Here is a chart of after-tax corporate profits:

Corporate Profits After Tax Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Recent Quarters Corporate profits (after tax)
2020 (first quarter) $1,739.103 billion
2020 (2Q) $1,557.064
2020 (3Q) $2,118.856
2020 (4Q) $2,082.470
2021 (1Q) $2,227.745
Source: Federal Reserve Bank of St. Louis, June 24, 2021 (saar)   

Critics sometimes allege that companies inflate their earnings, but nobody says corporations inflate their taxable income! If anything, companies want to avoid taxes, just like anyone else, but their taxable profits just keep rising, and over time S&P 500 earnings per share (EPS) tend to track the trend in NIPA profits.

Corporate Profits Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For the companies in the S&P 500, analysts now expect second-quarter profits to come in 64% better than those in the second quarter of 2020, which was admittedly badly handicapped by the COVID lockdown, but consider this: Second-quarter 2021 earnings are also expected to be 8% above the boomtime 2Q 2019 earnings, so this means our corporations have grown a net 4% per year in earnings through the pandemic!

Analysts usually under-estimate earnings – that’s why there are consistently more positive surprises than negative surprises during most reporting periods. Back in April, these same analysts were predicting that second-quarter earnings would be up 54%, a full 10 points lower. Could they still be under-estimating 2Q earnings? Could the final number be well above 64%? Perhaps, but don’t expect to see numbers that high ever again, perhaps in your lifetime (even if you are young), since a very strong second quarter is going against the weakest single quarter since the Great Depression, due to our sudden national lockdown. Economist Ed Yardeni is projecting earnings growth to “slow” to 22.9% in the third quarter and then +16.6% in the final quarter. If my math is right, that makes for an average of about 37% for the full year.

Analysts were way off the mark in forecasting the first quarter of 2021. At the beginning of the year, the consensus was that S&P profits would be up 16% in the first quarter (vs. the same quarter in 2020), but first-quarter profits for the S&P 500 were up over 48% in the opening quarter. At one point, we thought that would be the all-time high growth rate, but it looks like this quarter will surpass Q1 by a long shot.

There is still a record amount of money on the sidelines available to pour into stocks on any small (under 5%) correction. That’s why we haven’t seen any big corrections since October. M2 money supply is still near record highs, up $5 trillion since the start of 2020, while demand deposits (checking accounts) at commercial banks are up $2.4 trillion in the same 18 months, and our savings rate is at multi-year highs.

In addition, investors know There Is No Alternative (TINA) to stocks. Treasuries, bonds, cash, and now even junk bonds earn negative real (after inflation) yields, while bitcoins and most commodities are clearly risky, since inflation can be “transitory” in many commodities as supply chains come back in line.

So no, I would say stocks are not “ahead of their skis,” nor are most investors “too complacent” now.

Happy July 4th (Forget Bastille Day, and all those Other Pretenders)

In lockdown mode, I’m reading about 150 books a year, a 50% bump from my normal 100 books a year, and there are boatloads of worthy new books coming out. Soon, I will be attending Freedom Fest, where I usually participate in two or three author panels. One book I quoted last week is “Doom: The Politics of Catastrophe” by British historian Niall Ferguson. This week, I’d like to cite another British historian, Linda Colley, in “The Gun, the Ship and the Pen.” Her sweeping history focuses on Constitutions (hence “the Pen”) as instruments and/or reflections of military conquest (“The Gun, the Ship”). She begins with a short story on Corsica, but the main show is clearly the first three Revolutions and Constitutions in the last quarter of the 1700s – in the United States (1776), France (1789), and the slave revolt in Haiti (1798).

You can judge the three revolutions by the fruit of their outcome, their results. There is much criticism of our big blind spots and stains on the Declaration’s noble clarion call that “all men are created equal,” but disciplined historians should always ask: “Compared to what alternatives, at that time?” The French Revolution quickly devolved into a Reign of Terror, thousands falling to the guillotine, then the 20-year Napoleonic wars. France is now on its Fifth Republic and has had to be rescued twice from Germany in the last century, plus ongoing NATO protection. All that takes some luster away from Bastille Day.

The other 1790s revolution came in Saint-Domingue, now known as Haiti, in a slave revolt, but Colley writes: “Haiti’s early constitutions bristle nervously with provisions for military organization and strong rule. By its first such document, in 1801, Toussaint Louverture became ‘General-in Chief … for the rest of his glorious life’” (page 49). Subsequent rulers proclaimed a heredity kingdom, plus an aristocracy. There has only been grinding poverty for the 99% in Haiti over the last 200+ years after “freedom” came.

Meanwhile, the U.S. passed a profound Constitution from ‘We the People’ and a Bill of Rights within 15 years of its Declaration, then we slowly – too slowly – gave full rights to all citizens, unlike many others. Britain maintained not only a monarchy but an established class system of Lords and servants, so we must remember when criticizing our home team to keep our balance. We have often failed, but who has done a better job of marrying strength of power with freedom of expression in the painful history of this planet?

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
How Much Will 2nd Quarter GDP Grow?

Income Mail by Bryan Perry
What The Bond Market Is Saying About Inflation

Growth Mail by Gary Alexander
Is The Market Getting Ahead of Itself?

Global Mail by Ivan Martchev
The Dollar Looks Like It Wants to Run

Sector Spotlight by Jason Bodner
In This Age of Feelings, Facts are Still Safer!

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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