Stock Market Soars: Nasdaq Breaks Record Following Profitable Q3 Earnings; Anticipation for CPI and PPI Reports
In the second quarter of 2021, a significant gap has emerged between earnings and revenue growth, with earnings growth nearly doubling that of revenues. This disparity can be attributed primarily to operational improvements and efficiency gains, allowing companies to generate higher net income disproportionate to revenue increases.
For instance, Nu Holdings Ltd., a digital banking platform, reported an 85% rise in net income since 2021, nearly tripling quarterly net income to $637 million, while its revenue surged 85% to $3.7 billion. This suggests that cost management and margin expansion were key drivers behind earnings growth outpacing revenue gains.
This phenomenon is not exclusive to Nu Holdings. Tech-heavy sectors in Q2 2021 showed strong earnings growth, while commodity-linked sectors struggled due to inflationary pressures and tariff-driven input cost increases that limited their ability to maintain margins.
The sustainability of this earnings growth rate is questionable. While many companies have beaten earnings expectations, the market punishes earnings misses harshly, indicating investor expectations are high and earnings must be justified by continuing strong performance. Sustainability may hinge on continued operational efficiency and cost control, the ability to manage input cost inflation or pass it to customers, and sector-specific conditions.
Without sustained margin improvements and revenue growth, the current elevated earnings growth rate may be difficult to maintain long-term. However, companies demonstrating strong technological advances and operational improvements, as highlighted in Nu Holdings’ case, may sustain higher earnings growth relative to revenue.
In other market news, the Russell 2000 closed higher by 2.4%, and both the S&P 500 and the Nasdaq closed up by 2.4% and 3.9% respectively, reaching record highs. The Dow Jones Industrial Average also closed higher by 1.4%.
Additionally, Nvidia and Advanced Micro Devices have agreed to a deal to share a portion of their revenues with the U.S. government. This deal, a rare occurrence, is an export license for their H20 AI chip and MI308 chip respectively, when sold to China. Advanced Micro Devices would pay 15% for sales of their MI308 chip to China, while Nvidia would pay 15% of its sales from the H20 AI chip.
The Bureau of Labor Statistics (BLS) will release the latest Produce Price Index (PPI) on Thursday, and the latest Consumer Price Index (CPI) report will be released on Tuesday. Oklo, an advanced fission power company, is announcing earnings tonight, and Cisco and John Deere are companies announcing earnings later this week.
Lastly, VIX is back beneath 16, making options inexpensive. Oklo has gained over 250% this year, reflecting investor optimism in the company's potential.
[1] - Nu Holdings Ltd. Q2 2021 Earnings Release [2] - S&P 500 Earnings Beat Rate [3] - Fidelity Investments S&P 500 Earnings Outlook [4] - Bloomberg: Earnings Misses Wallop Stocks
- Despite a significant gap between earnings and revenue growth in the second quarter of 2021, companies in technology-heavy sectors, like Nu Holdings and potentially Nvidia and AMD, demonstrated strong earnings growth, fueled by operational improvements and cost management, possibly indicating a sustainable higher earnings growth rate relative to revenue growth, especially for those firms that consistently show technological advances.
- As the focus on sustainability and justifying earnings growth becomes more critical for companies, the Q2 2021 phenomenon of earnings growth outpacing revenue growth may rely on factors such as continued operational efficiency, input cost management, and sector-specific conditions for a long-term, elevated earnings growth rate. Simultaneously, the markets are closely watching events like the upcoming PPI and CPI reports, earnings announcements for companies like Oklo, Cisco, and John Deere, and changes in the VIX index to gauge investment opportunities and expectations.
