By Caroline Valetkevitch
NEW YORK (Reuters) – Investors will want to see if the upcoming quarterly reports and prospects of U.S. companies confirm expectations for a strong 2021 rebound in earnings and the economy plagued by the coronavirus pandemic.
U.S. equities are at a record high, boosted in large part by optimism that the rollout of vaccines to fight the COVID-19 virus will enable recovery, while hopes for more fiscal stimulus under President-elect Joe Biden, also supported the market.
The earnings reports for the last quarter of 2020 begin this week with the announcement of the results of JP Morgan, Citi and other major banks.
Earnings for S&P 500 businesses are expected to have fallen by 9.8% in the fourth quarter of a year ago, according to IBES data from Refinitiv.
However, earnings are expected to bounce back this year, with a profit of 16.4% forecast in the first quarter. The forecast has improved since the fall, while earnings of the S&P 500 are expected to grow by 23.6% in 2021, benefiting from easy comparisons with 2020.
Investors are perhaps even more eager to find out what company executives are saying about 2021 than to see fourth-quarter results as virus cases increase across the United States and Europe.
“Managers and analysts are going to be really focused, not necessarily on the back mirror. They are really thinking about 2021,” said Kenneth Leon, research director at CFRA Research.
What will also be key is ‘the impetus of each sector and how it affects investors by thinking about whether there is an attractive value and whether they might need to take a breather,’ Leon said.
The S&P 500 is trading at 22.7 times the term progress, which is much higher than the long-term average of about 15, based on Refinitiv’s data.
(GRAPH – US earnings for Q4: https://fingfx.thomsonreuters.com/gfx/mkt/dgkvlqnqepb/Pasted%20image%201610146723283.png)
“Stocks already reflect a fairly positive outlook for earnings,” said Rick Meckler, partner of Cherry Lane Investments, a family investment firm in New Vernon, New Jersey.
Earnings for the energy and industrial sectors are expected to have fallen the most of all sectors in the fourth quarter.
Although economically sensitive sectors such as these have outperformed the broader market in recent months, they have still lagged behind technology for 2020, and some’s valuations are generally considered less expensive than other sectors.
A large portion of the cyclical names fall under the “value” label, and investors have seen the Russell 1000 value index narrow the gap in the Russell 1000 growth index to the latest vaccine information.
As virus cases continue to increase, many strategists expect the greater recovery to take place in the second half of the year.
“Most likely, the outlook for the second half will increase as companies gain clarity and ultimately confidence,” Lindley Bell, chief investment strategist at Ally Invest, wrote in a report on Friday.
The uncertainty surrounding the recovery makes it even more important at this stage to get information from companies, even if it is not ‘formal’ guidance, says Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
“This is important for a market that wants to make the turnaround,” she said.
(Reporting by Caroline Valetkevitch; Additional Reporting by Lewis Krauskopf; Edited by Alden Bentley and Cynthia Osterman)