Investors will likely pay more attention to how management teams address the post-pandemic future.
Courtesy of NYSE
JPMorgan Chase, Citigroup, and other U.S. banks are set to kick off fourth-quarter earnings season this coming week, and a majority of S&P 500 companies will follow them over the next month.
Wall Street expects another down quarter, with S&P 500 earnings dropping 12% in the final three months of 2020 versus the same period in 2019, according to data from Bloomberg. Sales are expected to decline 6%.
Those numbers would be an improvement over the first and second quarters of 2020, during the strictest Covid-19 lockdowns and before many businesses had adjusted for the pandemic. But they would be a step back from the third quarter, when earnings were down 8.6% year over year on a 3% decline in sales. You can blame the spike in Covid cases—and lockdowns—for that.
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Still, a bad quarter shouldn’t matter much. Bullish and future-focused investors have been happy to look past speed bumps on the road to the post-pandemic recovery. Instead, they will likely pay more attention to how management teams address that future. As long as optimism prevails, the stock market should hold up just fine.
What’s more, the fourth-quarter reports could be the last challenging ones for a while. As 2021 starts, the year-over-year comparisons will get easier. More companies will show growth, needing only to beat 2020’s low bar. Wall Street even expects S&P 500 earnings and revenue to exceed 2019’s record levels this year—but with the gains more weighted toward the back half of the year, once Covid-19 vaccines have been widely distributed and the hardest-hit parts of the economy have reopened.
That’s all that the market has cared about for months. The huge rally since last spring hasn’t been driven by fundamentals—it’s been about pricing in the post-Covid world, underwritten by ultrasupportive monetary and fiscal policies that bridge the gap.
Shares of cyclical and economically sensitive companies—like energy and industrials—have been leading the market since the fall. Yet the sharpest year-over-year declines are forecast for energy companies. Analysts expect a 148% decline in earnings for the sector in the fourth quarter, while sales are forecast to tumble 35%. Energy stocks have gained about 30% during the past three months, buoyed by higher oil prices—probably all that matters for the sector, which is still down 30% over the past year.
Industrials’ earnings are seen falling 39% year over year on a 14% decline in revenue. Those numbers would be better than the prior two quarters, as the global manufacturing recovery has accelerated in recent months. Progress on stemming some of the declines would be seen as a win for many industrial companies. The sector’s earnings are forecast to return to year-over-year growth in the first quarter of 2021, joined by sales in the second quarter. That would help explain S&P 500 industrial stocks’ 12% rally in the past three months. Caterpillar (CAT), up 23% over that period, reports on Jan. 29. General Electric (GE) has surged 71% since early October. It reports on Jan. 26.
Some of the best fundamental performance in the fourth quarter is seen coming from health care, consumer staples, and utilities—the classic defensive sectors. Health-care earnings and sales are forecast to have grown 13.7% and 5.5%, respectively. Staples are seen posting 11% earnings growth on slightly higher revenue, while utilities could see a 9.5% jump in sales but a 4% decline in earnings. Yet utilities are off 2.3% during the past three months, while staples have gained just 1.7%. As long as the Fed and Congress keep the stimulus flowing, don’t expect a rush to defensive stocks.
Tech stocks, which have lagged cyclicals since the fall, are looking at a tough earnings season. The group grew earnings and sales in the first nine months of 2020 but now faces a difficult comparison to the year-ago period, which featured record sales and earnings for tech. Both measures are expected to have fallen last quarter, down roughly 6% and 10%, respectively.
Expect pressure on lofty multiples if highflying tech firms’ results disappoint. They won’t get nearly as much of a pass from investors as industrials or energy will. As for cyclical stocks, their reckoning might wait until the pandemic has passed. Only then will investors really judge them by their fundamentals again.
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Like Friday’s sour jobs report, fourth-quarter earnings season will paint an at best mixed picture—certainly not one that would support the S&P 500’s 12% rise in the quarter on its own.
But for the past several months, investors have been living in the future. Less-bad results than prior quarters and improving guidance should be more than enough to keep them happy.
Write to Nicholas Jasinski at [email protected]
