Three-minute macro: what’s driving earnings?
The drivers of equity market performance so far this year look very different than last. We’re also mindful of a potential cooling in the housing market, while we expect major financial institutions to keep track of inequality issues going forward.
Equity markets—show me the money!
The last two years of equity markets were driven by price-earnings (P/E) multiple expansion, but heading into 2021, our view was that equity market performance would be driven by earnings instead. The modest S&P 500 Index returns in 2021 so far have been driven by forward earnings per share (EPS) revisions, rather than forward P/E changes as we saw last year. With over 90% of S&P 500 Index names trading above their 200-day moving average, breadth has certainly improved within the equity markets. We view this as positive given that the index isn’t being held up by specific segments, but also believe this increases the importance of earnings as most companies have recovered substantially since their lows.
After the significant earnings beats for 2020 full-year results, we’ve seen plenty of upward earnings revisions, especially for the second quarter of 2021. We suspect this a function of both base effects (i.e., the very weak results of the second quarter of 2020) and the faster-than-expected vaccine rollout in the United States, which is accelerating the reopening. During Q1 earnings season, we expect markets to be sensitive to corporates results as they digest how the reopening is panning out against lofty expectations and already-rich valuations. Simply put, corporates will finally have to prove that they’re worthy of Wall Street’s optimistic expectations.
S&P 500 Index return breakdown (%)
U.S. housing—cooler heads may prevail
One of the pandemic’s darling sectors has been residential real estate. In particular, the U.S. market has surged on the back of low interest rates, favorable demographic factors, weaker supply, and nesting habits brought on by the pandemic. As of February, total home sales were up 23% year over year, while the ~1.9 million permits issued in January were roughly in line with the low end of the range seen in the real estate boom during the mid-2000s.
While we maintain that overall activity remains healthy, there are a couple of factors that suggest a potential cooling off during the second half of the year. Most fundamentally, changes in mortgage rates matter, with about a 4- to 6-month lag. While rates are still below where they were a year ago, the tailwind that we’ve experienced for the last 11 months has also started to fade and could weigh on activity around the beginning of the summer. The National Association of Home Builders’ (NAHB) survey is to some extent related to interest rates; it has started to moderate and would signal that the surge in permits and starts could subside. Finally, while we’re all looking forward to getting back to normal life, it could also beget a reversal of that nesting impulse as people benefit from improved mobility. This could improve supply on the existing home sales market and diminish any urgency to improve one’s living situation, which at the margin could contribute to a cooler market.
Is the U.S. housing market heading for a cooler summer?
Leaning in on the “S” in ESG
We get a lot of questions about the “S” in environmental, social, and governance (ESG) investing. From a macro perspective, three areas of focus in this realm that are increasingly relevant to our outlook are the discrepancy between the male and female labor force participation rates (gender inequality), the U.S. Federal Reserve’s (Fed’s) focus on BIPOC employment (racial inequality), and redistributive elements of fiscal policy (income inequality).
Regarding gender inequality, we note the positive impact to both growth and corporate earnings in countries where an increase in the female labor force participation rates is plausible. Levers that have been used to address this disparity in other countries have frequently included more supportive childcare policies, allowing women to reenter the labor force more quickly after having children. The U.S. female labor force participation rate remains dramatically lower than that of males, and gains in the second half of the 20th century have plateaued since then.
We also note the importance that income inequality is playing in President Biden’s proposed US$2 trillion infrastructure plan and policy agenda that aims to combat this inequality through tax increases—we believe these changes will be a cornerstone of upcoming fiscal policy. Finally, Fed Chair Jerome Powell has made several comments in the past year regarding racial inequality and has indicated that the Fed will be doing its part to combat this. We’re also seeing many large corporations step up with diversity and inclusion efforts.
We’ve said it countless times, but it bears repeating: We’re convinced that social issues will increasingly be an area of focus for major financial institutions, and we think that the aforementioned changes are just the tip of the iceberg.
Female labor force gains have plateaued
U.S. labor force participation rates
Important disclosures
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
PPM 534246
