Sturdy company income make traders cheer
Traders work on the trading floor of the New York Stock Exchange.
The blowout gains are forcing analysts to raise estimates for 2021.
With just over half of the reporting companies, the profits are proving to be a pleasant surprise for the trading community.
The GameStop / Robinhood fiasco turns out to be a minor slip up on the markets in the first few weeks of 2021. The main theme that ended in 2020 – belief in the effectiveness of a vaccine – remains intact.
“The markets are reaching new highs as the Covid cases are falling, the momentum is at the upper end of expectations and we continue to see very positive earnings surprises,” said Nick Raich of Earnings Scout.
Surprises and increases in yield
Stocks are expensive. The S&P 500 is trading at a historically high 22x gain from 2021. Two things had to happen in order for stocks to continue to gain: very high profit strokes for the fourth quarter and sufficiently clear company guidelines so that earnings estimates for the first, second and third quarters would continue to rise.
Both conditions were met. First, earnings beat estimates by more than 17%, roughly five times the normal average and at the level of the third quarter. The reason: Analysts underestimated the strength of the economic recovery.
Fourth Quarter Results: Half Time (53% reporting)
- Beat: 83%
- Percentage above estimates: 17.3%
- EPS growth: plus 1.6%
Second, earnings surprises now lead to higher estimates for the first and second quarters.
S&P 500: earnings estimates for the first quarter of 2020
- January 1st: plus 16%
- Today: plus 20.5%
S&P 500: earnings estimates for Q2 2020
- January 1: plus 45.7%
- Today: up 49.9%
Analysts are usually overly optimistic and cut their estimates as the quarter progresses. In the second quarter, however, the opposite occurred.
“This is an unusual occurrence. The road is usually lowering the numbers at this point in the current quarter,” DataTrek’s Nicholas Colas said in a recent note.
Technology, materials and real estate revenues were particularly strong.
With stocks this high, it’s no wonder that even strong earnings reports don’t make a huge difference to individual stocks. Christopher Harvey, director of equity strategy at Wells Fargo, noted that over the 24-hour period, companies posted positive returns, with the average stock falling 0.8%.
Ann Larson, senior analyst at Bernstein, noted that the S&P 500 was up about 18% in the past two and a half months, “possibly pre-discounting much of the good earnings results.”
Low interest + strong profits = stocks hit new highs
Another factor driving stocks to new highs is low interest rates.
“The US has never started an expansion with such low returns as it does today,” The Leuthold Group’s chief investment strategist Jim Paulsen said in a recent statement. “A combination of extremely low returns and strong EPS earnings has proven to be a uniquely positive opportunity for equity investors in the past.”
What could derail the revenue lollapalooza? Aside from one other event outside the left field like GameStop, it’s still all about the stimulus (go big will be successful, it seems) and the vaccine: “Covid is still a huge X-factor,” said Raich. “Will there be mutations and will the vaccines still be as effective as advertised? Otherwise stocks should continue to rise.”
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