Weekly Investment Update (04/30/2021)
Large-Cap Technology: First-Quarter Earnings Beat Expectations
While corporate earnings expectations were already elevated given the economic rebound, large-cap growth companies — Apple, Facebook, and Google, to name a few — posted impressive earnings beats over the past week. Apple reported revenues up 54% and added $90 billion to its share repurchase program. Facebook reported revenues up 48%, and management expects Q2 revenues to grow at 48% or slightly higher. Google profitability blew away expectations while management added $50 billion to the buyback program.
We are often asked whether higher yields should impede price progress of the large-cap technology companies. In the short term, this view often holds as historical correlations favor the lower re-rating of technology multiples when bond yields rise. This is largely due to the re-rating of the long string of future cash flows as discount rates (interest rates) move higher. However, when evaluating time horizons of a year or longer, changes in rates haven’t been the decisive factor for growth-stock returns; fundamentals tend to matter more.
In the near term, we continue to envision a push-pull in price terms for these large-cap technology companies in the context of stronger economic growth. As stronger economic growth expectations result in higher fixed income yields, we expect periodic lags in performance by this group. On the other hand, changes in top-line growth rates such as what was seen in the latest quarterly earnings reports should continue to support share prices over time. In the long run, fundamentals suggest continued impressive performance for this cohort. In the short run, we have added to more cyclical components of our equity platform to account for upward revisions in growth and inflation expectations, which should broaden equity market participation during moves higher.
The Fed: A Ways Away From Talking About Talking About Tapering
Fed Chair Powell stuck to his script amid questions from the press on the path toward tapering asset purchases, an increase in inflation leading to interest-rate hikes, and the progression of the COVID-19 virus. Specifically, Powell noted that the economy remains a long way away from achieving the “substantial further progress” that would incite the discussion of tapering asset purchases. On interest rates, Powell stated that they want to see labor market conditions consistent with maximum employment and inflation at 2% and on track to exceed that level. On the progression of the virus, the Fed Chair noted the committee’s focus on economic outcomes, which are, of course, tied to the status of the virus.
While many data sources continue to show tremendous strength roughly a year after the country’s economic trough, Powell was sure to emphasize the fact that payroll jobs are 8.4 million below where they were in February of 2020. In his words, “we’ve got a long way to go.” Additionally, as it pertains to inflation, Chair Powell noted that base-effects (last year’s depressed inflationary readings versus this year’s higher readings), supply bottlenecks, and reopening are likely to lead to transitory readings of higher inflation in the near term before returning to lower levels. He leaned heavily on the Phillips Curve, saying, “it seems unlikely that we would see inflation moving up in a persistent way that would move inflation expectations up while there is still significant slack in the labor market.”
While regional Fed price surveys paint a different picture than Chair Powell’s “transitory” view, mostly due to strong reopening demand and supply bottlenecks, our investment department remains focused on monitoring the probability of inflation printing much higher than the 2% average inflation target for a sustained period. After all, this would represent an inflationary regime shift and could alter the outlook for returns across asset classes. Note that our recent asset allocation shift — for clients who hold fixed income in their investment portfolios — was intended to prepare for the potential for increasing growth and inflation expectations over time.
Reopening Continues to Accelerate as Glimpses of a “New Normal” Post-COVID-19 Economy Are Emerging in Areas With High Vaccination Rates
As vaccines curb infections in several developed countries, restrictions are easing, and people are resuming more normal activities. Mall owners are hopeful their business has permanently turned a corner with U.S. mall foot traffic up over 85% relative to March 2020, even though it remains roughly 25% below March 2019 levels. Shoppers have been eager to return to pre-pandemic activities, especially as many are armed with COVID-related savings or government stimulus checks. Dining activity is also now up to 80% of 2019 levels with some parts of the country, including Denver, Las Vegas, and Houston above pre-COVID numbers, while some other areas — such as New York City and San Francisco — recover more slowly. Still, recovery is happening as can be evidenced by New York City’s announcement that it is targeting a July 1 fully reopen date for 100% capacity at restaurants, stadiums, and museums with schools entirely in-person for the school year starting in September.
We have looked to countries with successful vaccination campaigns for glimpses of what the “new normal” of post-pandemic life might look like, specifically in terms of the speed and openness of different parts of the economy. Israel, a leader in its vaccination rollout, has seen packed bars and restaurants as well as music concerts for those who show proof of COVID vaccination. The next step for the country will be to reopen its tourism sector in May to travelers with negative COVID tests, a requirement that is becoming common in tourist destinations. Another bright spot, Gibraltar, a U.K. territory, has vaccinated roughly 85% of adults and 98% of adults over 60. In turn, schools and businesses have opened, customers are eating indoors, and masks are only required in a few places, including buses and healthcare facilities. The U.K. is also exploring whether rapid testing (in conjunction with vaccination) can be used to more broadly reopen parts of the economy that have remained closed or at limited capacity, including cinemas, theaters, concerts, and spas.
Overall, we remain very positive on the reopening path of the U.S., which is becoming increasingly reflected in consensus market expectations. We are increasingly turning our focus to vaccination and reopening progress in the rest of the world, especially Europe, which is currently reaching an acceleration point. We also continue to monitor the potential risks that additional variants and waning vaccine effectiveness may pose in maintaining open economies into the coming fall and winter.
— Bessemer Investment Team
Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indexes in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.