August 2021
July Delivered an Earnings Windfall, a Bond Rally, the Delta Variant, and Low Valuations for International Stocks

Are International Stocks Cheap Enough?

By the end of July, stocks’ rough start to the month was a distant memory. Still, some investors seemed to be looking with suspicion at the upwardly trending market. What about the Delta variant? Are those low interest rates signaling economic weakness to come? Why are so many manufactured items still on backorder? A key driver of the market’s resiliency in July deserves little suspicion—earnings are coming in strong. With just over half of companies reporting Q2 earnings, collectively, earnings are nearly 18% ahead of estimates.

A bit of an assist could go to the U.K., whose unexpected drop in COVID-19 cases helped assuage Delta variant concerns among U.S. investors. Seeing another country perhaps ahead of the U.S. in the virus fight is a reminder that the U.S. is not alone in the world, it may or may not be the leader in the fight against the virus, and is not the only investment choice in the world either—which makes for a useful catalyst to take a fresh look at the broader opportunity in international equities.

The valuation case is quite clear: Years and years of underperformance have pushed the MSCI EAFE index down to less than 50% of the price-to-book ratio of the S&P 500, which is an all-time low.


Relative Price-to-Book Ratio of the MSCI Developed International Stock Index vs. the S&P 500 Index

Source: Bloomberg. Price-to-book value is the ratio of the price of a stock (or index) versus book value per share.

Valuation, of course, has not been a sufficient condition to drive international equities this century. However, consider this: With just over half of companies reporting, MSCI EAFE earnings are running nearly 32% ahead of estimates—almost double that of the S&P 500. Year-over-year growth (admittedly a pandemic-depressed comparison) is over 180%, which is also roughly double that of the S&P 500. Economic recovery forecasts look solid as well. Bloomberg consensus estimates are forecasting 2022 gross domestic product growth for Western Europe at 4.4%, compared with 4.2% for the United States.

Bloomberg consensus estimates cover all key income statement, balance sheet, and cash flow measures and are directly comparable to company-reported results. Point-in-time daily snapshots go back to 2007. Bloomberg’s product also covers quantitative company guidance metrics such as sales, gross margin, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

The U.S. accounts for roughly two-thirds of the world’s equities, so while an overweight position in international equities may not be justified, neither is no exposure at all.


U.S. Large Cap Growth topped the charts, with all asset classes in the green but for the riskiest equity market segments—small caps and emerging markets. The bond market rally still left all but high yield bonds in the red for the year.

Returns of Various Common Market Segments

July 2021

Source: Bloomberg. Performance quoted represents past performance and does not guarantee future results.

Economic Calendar

Here’s a list of upcoming key economic releases, which can serve as a guide to potential market indicators.

Equity Perspectives
Delta Variant Headlines Overshadowed by Earnings Windfall

With coronavirus cases in the United States seeing a resurgence, some are beginning to question the economic impact from the potential reintroduction of social distancing requirements. Will the Delta variant reignite lockdown measures across the United States? How will this affect growth?

Despite these concerns, the S&P 500 continued to reach new highs in July, but not for unwarranted reasons. Earnings season kicked off with a bang. According to FactSet, through July 30, 59% of S&P 500 companies reported Q2 earnings. Of those companies, 88% delivered an earnings surprise, with the blended earnings growth rate coming in at a whopping 85%.

Though we are still awaiting results for the rest of the index, if 85% is the final growth number, it will be the highest year-over-year earnings growth rate reported by the S&P 500 since Q4 of 2009. With respect to valuations, earnings results throughout the year have been enough to bring the price-to-earnings (P/E) ratio of the market below where it stood at the end of 2020. This is an impressive feat given the market’s strong performance, which is now up nearly 18% on a year-to-date basis.

S&P 500 P/E Ratio vs. Price

Bloomberg. Price to earnings is the ratio of the price of a stock (or index) to the earnings per share of the trailing 12-month period.

What About Volatility?

While the S&P 500 continued to reach new highs in July, volatility remains elevated. The VIX index, which indicates the degree of expected volatility of the S&P 500, has yet to return to pre-pandemic levels.

The VIX is the common name for the Chicago Board Options Exchange's CBOE Volatility Index.

Riskier pockets of the market, such as small caps, have not performed as well, with the Russell 2000 falling nearly 4% in the month of July. While small caps delivered an impressive rally following the correction seen last year, they’ve been fairly stagnant since the start of the second quarter, up just 0.5% versus 11.1% for their large cap counterparts.

For those investors looking to maintain exposure to small caps, being selective in small cap investments may help combat volatility concerns. Small cap dividend growers have generally exhibited hallmarks of quality, like stable earnings and solid fundamentals, and have historically been less volatile than the broader small cap market. With respect to valuations, the Russell 2000 Dividend Growth Index, which tracks small caps stocks of the Russell 2000 with a minimum of ten consecutive years of dividend growth, is currently trading at a discount to the Russell 2000 Index of roughly 34%—indicating that quality is on sale within small caps and that a potential buying opportunity may be upon us.

Price-to-Book Ratio of Small Caps vs. Small Cap Dividend Growers

Source: Bloomberg, data as of 7/30/21. Price-to-book value is the ratio of the price of a stock (or index) versus book value per share

Fixed Income Perspectives

A Bond Rally

Duration was your friend in the fixed income market in July as the U.S. 10-Year Treasury Yield fell 25 basis points (bps) over the month. The impact of slight spread widening was eclipsed by that of falling Treasury yields, which kept corporate bonds (with the exception of senior loans) in the green.

Duration is a measure of bond price sensitivity to a change in interest rates.

It’s worth noting that the strong performance of Treasury inflation-protected securities (TIPS) was predominantly driven by that fall in Treasury yields—not an increase in inflation expectations. Many investors may not be aware of the duration exposure of TIPS. And if Treasury yields rise without much of an increase in inflation expectations, investors expecting TIPS to protect from rising Treasury yields may be surprised with a loss.

Fixed Income Segment Returns-MTD

Source: Bloomberg

Where Could We Be Heading?

Taper talking to reverse quantitative easing has begun, and many fixed income strategists see tapering beginning in 2022—a development that should be pushing Treasury yields higher. Instead, bonds rallied, and yields fell in July with the Delta variant the likely culprit. However, the Bloomberg 2022 consensus estimate for the 10-Year Treasury yield barely budged and remains over 2%. Treasurys are simply expensive—likely too expensive. Here’s why:

The scope of economic shutdown that drove yields to record lows in 2020 appears extremely unlikely and may be a political impossibility. The Delta variant also appears to be driving higher vaccination rates, further decreasing the chances of the most adverse outcomes. The chances of an adverse economic outcome sufficient to push yields even lower appear to be low. The better odds point to continued economic recovery and, perhaps sooner rather than later, Fed tapering. Both of which point to higher Treasury yields.

ProShares Investment Strategy Team

Sources for data and statistics: Bloomberg, FactSet, Morningstar, ProShares.

The different market segments represented in the performance recap charts use the following indexes: U.S. Large Cap: S&P 500 TR; U.S. Large Cap Growth: S&P 500 Growth TR; U.S. Large Cap Value: S&P 500 Value TR; U.S. Mid Cap: S&P Mid Cap TR; U.S. Small Cap: Russell 2000 TR; International Developed Stocks: MSCI Daily TR NET EAFE; Emerging Markets Stocks: MSCI Daily TR Net Emerging Markets; Global Infrastructure: Dow Jones Brookfield Global Infrastructure Composite; Commodities: Bloomberg Commodity TR; U.S. Bonds: Bloomberg Barclays U.S. Aggregate; U.S. High Yield: Bloomberg Barclays Corporate High Yield; International Developed Bonds: Bloomberg Barclays Global Agg ex-USD; Emerging Market Bonds: DBIQ Emerging Markets USD Liquid Balanced.


This is not intended to be investment advice. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. Whether or not actual results and developments will conform to ProShare Advisors LLC's expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.

Investing involves risk, including the possible loss of principal. This information is not meant to be investment advice.

Bonds will decrease in value as interest rates rise. International investments may also involve risks from geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and economic or political instability. In emerging markets, many risks are heightened, and lower trading volumes may occur. Small- and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

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