Good start to Q4 earnings and our hypothesis of interest rate sensitivity

Around 55 companies have reported Q4 earnings in the S&P 500 and the earnings surprise ratio is so far 90% while the positive revenue surprise ratio is 74%. In terms of revenue growth, the best sectors are consumer staples helped by stimulus checks and the health car and IT sectors. In the bottom of the revenue growth ranking we find energy and industrials. It is still early days, but the numbers so far indicate a good Q4 earnings season despite a more negative backdrop with the new lockdowns and restrictions in the developed world. The few earnings releases that we have got in Europe have so far also been to the positive side.

As we showed on Monday in our Q4 earnings week preview, earnings growth was stagnating before the pandemic and on a longer horizon since the financial crisis earnings growth is only barely positive for MSCI World in nominal terms. In other words, the lower discount rate is the key catalyst that has supported rising equity valuations and sustained the bull market. Our hypothesis is that the interest rate sensitivity in the equity market has gone up as we talked about in our note Democratic sweep, interest rate sensitivity, and reflation from 6 January.

The problem is that it is difficult to quantify as the long-term relationship is that higher interest rates come with higher equities (opposite of our hypothesis). One of the reasons for this relationship is that we have had 40 years of lower inflation and thus most periods of rising interest rates have been that of higher growth and less about inflationary pressures. Secondly, if we shorten the time period we look at, say only look at 2020 data, then the unusual market moves and big data outliers during the February and March selloff again makes it difficult to quantify our hypothesis.