The ‘Barron’s Roundtable’ panel gives the reaction and analysis of the market week that was
An epic stock recovery faces a key test in the coming weeks, as investors learn what executives expect from earnings and revenues in the coming periods.
The fourth-quarter earnings season began on Friday with better-than-expected earnings from some of the country’s largest banks. Despite record quarterly earnings at JPMorgan Chase & Co. and some good points at Citigroup Inc. and Wells Fargo, shares in all three fell, with Wells and Citi falling more than 6% each.
The market reaction highlights the risks as large companies begin to share quarterly results and, more importantly, their outlook for the coming quarters. Although the results were not dire, stocks were hit hard, reflecting rising investor expectations, as banks’ shares rose more than 10% in 2021 toward Friday’s trading.
The wave of big indices for new hikes this year, despite the accelerated coronavirus tax and questions about how it will affect economic prospects, highlights the pressure on executives at large companies to explain how they expect results to improve in 2021. Soft profits during the S&P increase of around 70% over last March’s intraday low were considered acceptable by investors because many expect a sharp recovery this year. Companies whose projections are insufficient can expect to be punished, they say.
“Whether they had a good quarter or not, what matters is what lies ahead,” said Kimberly Woody, senior portfolio manager at Globalt Investments, who manages $ 1.9 billion. “Good future news has been quoted in this market.”
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With accounts closed in 2020, analysts estimate that profits for S&P 500 companies fell 13% in the year, according to FactSet. Even so, the S&P 500 companies traded on Thursday at 22.65 times the projected profit for the next 12 months, above the five-year average of 17.84, according to FactSet.
Dozens of major companies are due to report this week, including transportation company JB Hunt Transport Services Inc., healthcare giant UnitedHealth Group Inc., oilfield services company Halliburton Co. and semiconductor maker Intel Corp.
S&P 500 gains may have fallen 6.8% in the fourth quarter from the previous year, a marked improvement over the second quarter’s 32% collapse, but not the kind of performance that normally inspires record highs in the stock market. Profit estimates have increased since the beginning of the quarter, and some investors expect current forecasts to be a low barrier that companies will overcome.
Stock buyers are counting on gains of more than a year, and many investors say the market has moved forward despite the damage of 2020 because of the widespread belief that vaccines will help put the pandemic in the past, allowing businesses to recover.
“I think the market is looking into the pandemic and that is why we see it continuing to rise,” said Greg Marcus, managing director of UBS Private Wealth Management.
This is despite worrying signs about how the pandemic has recently weighed on the economy: employers cut 140,000 jobs last month, ending seven months of job growth, and US retail sales fell in December for the third consecutive month.
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S&P 500 profits are expected to return to year-on-year growth in the first quarter, increasing 17% and then 46% in the second quarter. And economists have increased their predictions for economic growth in the United States in light of vaccines and Washington’s potential for additional aid to families and businesses.
The stocks that tend to be linked to the economic outlook have recently performed well. Since the beginning of the fourth quarter, the financial sector of the S&P 500 has advanced 28%, while the material group has gained 19%. The technology sector, which led the benchmark in 2020, grew 9.1% in that period.
In December, US Bank Wealth Management increased its shareholding by buying shares in mid-cap American companies, said Lisa Erickson, head of the traditional investment group.
“As we continue to see progress on the economic front with the vaccine – and seeing that companies were holding on in a difficult environment in 2020 – it really gave us confidence that, going into this year, areas that were more leveraged to o the reopening would have a superior performance ”, she said.
Earnings expectations point to a better scenario for some of these cyclical groups. The S&P 500 materials sector is expected to show the best earnings growth in the fourth quarter, up 8.6%. Financial companies’ profits are expected to increase 3.5%, a marked improvement over the forecast of a 24% decline in late September.
Among the S&P 500 companies that reported profits, the majority exceeded expectations. This includes construction company Lennar Corp., which reported higher profits as low borrowing costs and changes in housing preferences drove demand for real estate.
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Some investors expect company executives to clarify which changes driven by the pandemic in consumer spending habits may outlast vaccines.
“We think some of the spending changes are difficult in nature,” said Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Company. “When you buy a pet, it’s more than a 12-month subscription in terms of the expenses you will have on pet-related products.”