Equities continued their upward trend during the month of April, supported by further outlook optimism and a strong start to the first quarter earnings season that is characterised by better than expected sales and double digit earnings surprises.
The US equity broad market index outperformed European equities on a monthly basis, with the S&P 500 Index closing 4.1 per cent, and recording an intra-month record high. Meanwhile, the European equity market notched less than half that return, of 1.2 per cent. In the US, all underlying sectors posted monthly gains, except for energy, with the strongest performance recorded across the cyclical sectors, as the economy continues to reopen and rebound. The real estate, consumer discretionary and communications sectors led the gains, followed by companies listed within the financials and materials sectors, which all outperformed during the month of April.
Over the month, the US equity market accelerated towards record highs, as more companies reported their quarterly earnings results. So far, 60 per cent of S&P 500 listed companies have reported first quarter earnings, which were characterised by a strong beat across sales and earnings. Despite that expectations picked up since the start of the year, overall earnings have so far beat expectations by 24 per cent and aggregate sales reported are close to 4 per cent higher than expected.
The financial sector not only surpassed revenue expectations but also posted the largest earnings surprise so far. Bank earnings, which kicked off the start of the quarterly reporting period, benefitted from a higher contribution from investment banking fees, and lower credit costs on the back of an improving economic backdrop. In this regard, quarterly Gross Domestic Product data released last week signals the start of an economic boom. The US economy expanded by 6.4 per cent over the first three months of the year on an annualised basis, primarily boosted by a strong increase in consumer spending.
Across the Atlantic, European equity markets also gained over the month of April, albeit to a lesser extent. Similarly, cyclically exposed sectors such as the technology, real estate, and materials recorded monthly gains. Nonetheless, the defensive consumer staples sector notched the strongest outperformance over the month, as end of month economic data showed that the Eurozone entered a double dip recession. The biggest detractors were energy companies, down close to three per cent on the month. From a top-line perspective, sales growth remains relatively weaker, however, aggregate results show that half of the Euro Stoxx 600 listed equities that have reported so far, managed to beat both sales and earnings expectations. Moreover, the outlook for Europe further improved upon encouraging forward looking indicators and an acceleration on the number of vaccine doses administered, which provides hope for growth over the coming months.
Furthermore, despite the economic divergence between the regions, the monetary policy meetings held during April, both showed unwavering support. The stronger economic recovery and inflation pick up in the US was reflected in the Fed statement, which stated that “indicators of economic activity and employment have strengthened” compared to the previous text of “turned up recently”.
Nonetheless, Fed Chair Jerome Powell, squashed any ideas of tapering and clearly stated that the pickup in economic activity so far “does not constitute substantial further progress”. Similarly, ECB president Christine Lagarde communicated that the Governing Council remains focused on enabling favourable financing conditions and will continue implementing the Pandemic Emergency Purchase Programme at the significant higher pace for the time being.
Disclaimer: This article was written by Rachel Meilak, CFA, equity analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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