Execution Risk of Economy Reopening

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Morgan Stanley’s podcast on “Realities of Reopening” offered some insightful ideas about the widening spread between S&P 500 performance, and reopening equity classes like the small-cap Russell 2000.
Here’s a chart of the two showing a 4% gap. Figure 1. [Source: Bloomberg]

The “execution risk” of reopening is related to higher prices of restarting the economy resulting from supply shortages of materials, and logistics bottlenecks. This is expected to put pressure on Q1 Earnings and Q2 guidance of companies.

A contrasting data point is the record upward guidance revision for Q1 in several years by S&P 500 companies. Revenue guidance numbers much higher but so is EPS guidance, both are higher than anything seen since 2016.






Boxplot of Revision Numbers for Q1, 2021 compared to quarters dating back to 2016. The Q1, 2021 EPS and Sales numbers (labeled) are clear outliers with relatively higher numbers. [Source: Based on data from Bloomberg]

These S&P 500 numbers don’t represent the small-cap companies that may experience more earnings pressure as reflected on the RTY performance above. 

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