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Markets have gone back and forth while assessing the prospects for Trump’s economic plans
and the timing of U.S. rate hikes. Last week, risk assets in DM and EM progressed, stirred by
supportive data and Trump’s plans to unveil a “phenomenal” tax policy. Most hedge funds
headed north. CTAs thrived on their long equities. Macro funds’ dollar crosses were also
rewarded. Special Situation funds benefited from the increasing prospect of corporate activity.
Additionally, L/S Equity funds continued to make steady progress. We took a close look at the
earnings reports this season, usually a reliable barometer of the alpha environment. It is well
underway in the US, where 80% of the S&P 500 companies reported earnings and revenues
which were up +5.5% and +4.7% y/y, respectively (sce: Bloomberg).
This confirms an on-going
profit recovery with, unlike other recent earnings seasons, decent top-line growth.
These encouraging trends weren’t unexpected: earnings surprises were in line with historical
averages, while revenue surprises and EPS beats underwhelmed. As a result, stock prices
progressed before reports, but slightly receded afterward. Moderate trading volumes
emphasized investors’ wait-and-see stance amid high policy uncertainty. However, the decline
in stock volatility after earnings announcements reflected persisting optimism. The dispersion in
surprises was mild, except in the consumer discretionary, staples and energy sectors.
While these patterns suggest a limited potential for stock picking, this season actually made
strong room for fundamental pricing. The momentum in individual stock prices was closely in
line with that in their earnings and revenues.
Further, in contrast with the Q3 season, which saw
returns mainly driven by sector moves (after the U.S. elections), this season returns were
largely idiosyncratic.
It is true that modest stock dispersion and the gyrations in politics cap the potential for value
extraction. However, low stock correlation, the dominance of fundamental pricing, and multiple
corporate catalysts are providing strong tailwinds benefitting stock pickers. We continue to favor
the fundamental approaches in the US – including neutral equity and event driven funds.
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