I often hear that critics from right and left dismiss the environmental, social and government movement (ESG) as warm-hearted nonsense. The cynical view is that ESG is just a ploy to create feel-good practice and prevent government regulation.
I’m happy to tell you that the cynics are wrong. ESG is not just a PR gimmick. The ESG movement is truly altruistic while driving profits for companies and investors alike.
ESG is already a big trend and it’s gaining pace. ESG assets are expected to exceed $ 53 trillion globally by 2025, which would represent more than a third of the expected $ 141 trillion in global assets according to the latest data from the World Economic Forum.
More about ESG and what it means for investors in a minute. First, let’s take a look at what is driving the markets right now.
Stocks have become expensive and many analysts are wringing their hands over the overvaluation. The forward 12 month price / earnings ratio (P / E) for the S&P 500 is 21.0. This PER is above the 5-year average (18.2) and above the 10-year average (16.3).
But, according to FactSet data, projected corporate earnings growth justifies those multiples. For the third quarter of 2021, the estimated earnings per share (EPS) growth rate for the S&P 500 is 27.9% year over year.
If 27.9% is the actual growth rate for the third quarter, it would be the index’s third-highest growth rate since 2010.
For the fourth quarter of 2021, the consensus of the analysts calls for EPS growth of more than 20%. Of course, the strong quarterly results this year are in large part due to lower baseline levels in 2020, when operating results were knocked down by the pandemic. The fact is, however, as businesses reopen, they also make robust profits.
Read this story: From growth to value … and back again
The bull market still has legs. On Monday, the Dow Jones Industrial Average rose 261.91 points (+ 0.76%) and the S&P 500 rose 10.15 points (+ 0.23%). The tech-heavy NASDAQ lost 9.91 points (-0.07%). The small-cap Russell 2000 climbed 13.24 points (+ 0.59%).
Inflation is cooling …
The US Bureau of Labor Statistics reported Tuesday that the country’s consumer price index (CPI) is still up but has pulled back from recent highs.
Broad CPI rose 0.3% in August compared to July, below analysts’ forecast 0.4% and 0.5% released last month.
Last month’s CPI rose 5.3% compared to August 2020. That year-over-year figure was in line with consensus estimates and was slower than July’s 5.4%.
The core CPI indicator (excluding volatile food and energy prices) also slowed more than expected, trading at 4.0% y / y in August after rising 4.3% in July. Estimates had called for a 4.2% increase in the core CPI. The result: inflation is easing as distortions in the supply chain are eliminated.
Wall Street cheered the news. After Tuesday’s opening bell, the Dow, S&P 500, NASDAQ and Russell 2000 all traded significantly higher. Those who have argued that hot inflation is “temporary” have proven correct.
A pillar of the bull market is the increasing optimism of corporate management. More S&P 500 companies have issued above-average positive EPS forecasts for the third quarter.
To date, 101 companies in the index have published an EPS forecast for the third quarter of 2021. Of these 101 companies, 47 published a negative EPS forecast and 54 a positive forecast. The proportion of companies that give a positive EPS forecast is 53% (54 out of 101), which is well above the five-year average of 39%.
As a sign that inflation’s damage to bottom line has been dampened, the estimated net profit margin for the S&P 500 for the third quarter is 12.1%, beating the five-year average of 10.6% and last year’s net profit margin of 10.9% . .
Make green by going green …
In a new poll released on September 10, FactSet searched for the term “ESG” in the conference call transcripts of all S&P 500 companies that had phone calls from June 15 to September 5.
Of these companies, 150 named “ESG” in their earnings calls. This number corresponds to the second quarter for the highest total number of S&P 500 companies that top ESG on earnings views that go back at least 10 years (see chart).
The terms “decarbonisation” or “clean energy” (or both) were mentioned in 19 (13%) of these companies in ESG discussions. These quotes align with the growing urgency of businesses around the world to cut carbon emissions in order to tackle climate change.
More and more institutional investors are adopting ESG screening using ratings from a number of third-party providers and indices.
Companies get low ESG scores for a variety of factors, such as: B. Out of office messages, poor product and workplace safety data, abusive office environments, and excessive pollution. The premise is that a low ESG score increases a company’s risk of costly litigation, fines, and high employee turnover. In contrast, the best ESG scorers are likely to be innovators and market leaders with less wasteful practices.
BlackRock (NYSE: BLK), the world’s largest asset manager, recently launched several new exchange-traded funds (ETFs) that track ESG-focused companies. A company’s ESG score has emerged as an important valuation metric among the public, financial analysts and investors.
More and more ESG-oriented investment funds are designed with a “negative screen” in order to exclude fossil fuels. Together with the private sector, governments are stepping up their green efforts.
President Biden’s $ 1.2 trillion infrastructure plan provides significant funding and incentives for decarbonization and clean energy. In addition to $ 73 billion to modernize the power grid, the infrastructure plan includes a $ 46 billion investment in producing clean energy that would fuel the burgeoning wind and solar energy industries.
In addition, earlier this month, Biden released an ambitious plan that would see the country producing nearly half of its electricity from solar energy by 2050.
As I have just made clear, the conditions for growth are still in place. In fact, we’ve found a growth stock that will not only beat the S&P 500 for the coming months, but it will too crush it.
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John Persinos is the editorial manager of Invest every day. Send your questions or comments to [email protected] To subscribe to John’s video channel, click here.