NEW YORK (Reuters) – Investors will be curious to see if upcoming quarterly reports and outlook from US companies confirm expectations for a strong pick-up in earnings and the economy in 2021, which was ravaged by the coronavirus pandemic last year.
US stocks are at record highs, fueled in large part by optimism that the introduction of vaccines to combat the COVID-19 virus will enable recovery, while hopes for more fiscal stimulus under US President-elect Joe Biden also increase the market.
Earnings reports for the last quarter of 2020 begin this week, with results from JP Morgan, Citi and other major banks released.
According to Refinitiv’s IBES data, revenues for S&P 500 companies are expected to decline 9.8% in the fourth quarter from a year ago.
But earnings are expected to rebound this year, with earnings expected to be 16.4% for the first quarter. That forecast has improved since the fall, with the S&P 500’s profits expected to grow 23.6% in 2021, thanks to easy comparisons to 2020.
Investors may be even more curious about what business leaders are saying about 2021 than about fourth-quarter results, which come as virus cases increase in the United States and Europe.
“Managers and analysts will be really focused, not necessarily on the rearview mirror. They are really thinking about 2021, ”said Kenneth Leon, research director at CFRA Research.
What will also be the key is “the pulse of each industry and how it affects investors in terms of thinking whether there is an attractive value there or whether they might need a breather,” Leon said.
The S&P 500 is trading at 22.7 times expected earnings, well above the long-term average of about 15, based on Refinitiv’s data.
(CHART – US Revenues for Q4 🙂
“Stocks already reflect a pretty positive earnings outlook,” said Rick Meckler, partner at Cherry Lane Investments, a family-owned investment firm in New Vernon, New Jersey.
Earnings for the energy and industrial sectors are expected to decline most of all sectors in the fourth quarter.
While economically sensitive sectors such as those outperforming the broader market in recent months, they still lagged behind technology before 2020, and their valuations in general are considered by some to be less pricey than other sectors.
Much of the cyclical names are labeled ‘value’ and investors have watched the Russell 1000 value index close the gap on the Russell 1000 growth index after positive vaccine news.
With virus cases still on the rise, 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 get higher as companies gain clarity and eventually confidence,” Lindsey Bell, lead investment strategist for Ally Invest, wrote in a report Friday.
Still, the uncertainty surrounding the recovery makes getting information from companies even more important at this stage, even if it isn’t “formal” guidance, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
“That’s important for a market that wants to turn corners,” she said after a difficult year.
Reporting by Caroline Valetkevitch; additional reporting by Lewis Krauskopf; Editing by Alden Bentley and Cynthia Osterman