NEW YORK (Reuters) – Investors will be eager to see whether the next quarterly reports and the prospects of American companies validate expectations of a strong recovery in profits and the economy in 2021, which were devastated by the coronavirus pandemic last year.
US stocks are at a record high, driven largely by optimism that the launch of vaccines to combat the COVID-19 virus will allow this recovery, while hopes for further fiscal stimulus under US President-elect Joe Biden, too sustained the market.
Earnings reports for the last quarter of 2020 begin this week, with the release of results from JP Morgan, Citi and other major banks.
The profits of S&P 500 companies must have fallen 9.8% in the fourth quarter compared to the previous year, according to IBES data from Refinitiv.
But earnings are expected to recover this year, with a 16.4% gain projected for the first quarter. That forecast has improved since the fall, while S&P 500 earnings are expected to grow 23.6% in 2021, benefiting from easy comparisons with 2020.
Investors may be even more interested in finding out what the company’s executives say about 2021 than in seeing the results of the fourth quarter, which arise with the increase in cases of viruses in the United States and Europe.
“Managements and analysts are really going to focus not necessarily on the rear view mirror. They are really thinking about 2021, ”said Kenneth Leon, director of research at CFRA Research.
What will also be important is “the pulse of each sector and how it affects investors in terms of whether there is attractive value there or whether they need to breathe,” said Leon.
The S&P 500 is trading at 22.7 times future earnings, well above the long-term average of around 15, based on data from Refinitiv.
(GRAPHIC – US earnings for the fourth quarter 🙂
“The shares already reflect a very positive outlook for earnings,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment firm in New Vernon, New Jersey.
Gains in the energy and industrial sectors must have declined more than all sectors in the fourth quarter.
While economically sensitive sectors like these have outperformed the broader market in recent months, they still lagged behind technology in 2020, and their ratings are generally seen by some as less expensive than other sectors.
A large proportion of cyclical names fall under the “value” label, and investors have seen the Russell 1000 value index close the gap in the Russell 1000 growth index after optimistic news about vaccines.
With virus cases still on the rise, many strategists expect a major recovery to occur in the second half of the year.
“Most likely, the prospects for the second half will rise, as corporations gain clarity and ultimately trust,” wrote Lindsey Bell, chief investment strategist at Ally Invest, in a report on Friday.
However, the uncertainty surrounding the recovery makes obtaining information from companies even more critical at this stage, even if it is not a “formal” orientation, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
“This is important for a market eager to turn the corner,” after a difficult year, she said.
Reporting by Caroline Valetkevitch; additional reporting by Lewis Krauskopf; Editing by Alden Bentley and Cynthia Osterman