A debate about the reasonability of equities, particularly US stocks, is raging among investors. Our view has always been that while valuations may seem steep, they are supported by underlying economic fundamentals, and strong earnings numbers coming through from US companies are vindicating us.
With Q1 earnings underway, 258 out of 300 companies have reported earnings ahead of analysts’ expectations. Notable is the magnitude of outperformance: in aggregate, companies reported earnings that are 22.8% above expectations. This surprise reading is above the 1-year (+14.5%) average and the 5-year (+6.9%) average.
If the earnings strike rate continues at this rate, prevailing high PEs will revert to normal levels before the end of the year. However, any glitches to the vaccination rollout and emergence of new variants will hamstrung pace to normality.