Investors looking for clarity but likely won’t get it
People pass a sign for JPMorgan Chase at it’s headquarters in Manhattan, New York City.
Spencer Platt | Getty Images
Earnings season is upon us, but traders will be far less interested in fourth-quarter results than in first- and second-quarter guidance.
The problem is it’s not clear that CEOs will cooperate.
Banks are strong going into earnings
Big banks like JPMorgan Chase kick off earnings season on Friday on a good omen: Banks are strong going into earnings season.
“This is the first earnings season in recent memory where banks have been leaders going into earnings season,” said Tactical Alpha’s Alec Young.
Indeed, the SPDR Bank ETF (KBE), a basket of large banks, is up 30% since the November election, far outperforming the S&P 500.
And unlike much of the market, bank stocks are not overpriced.
“They have a lot of room to move up, they are not expensive,” Young said.
Why we need guidance now
“As earnings season gets underway and gathers momentum a key factor to Q4 earnings season will be not just how expectations were met, missed, or exceeded in the quarter but how managements of the companies reporting frame the quarters that lie ahead,” Oppenheimer Asset Management’s John Stoltzfus said in a note to clients.
Strong 2021 earnings guidance is critical to confirm the foundation of the rally: that massive stimulus combined with an effective vaccine will result in a dramatic expansion of corporate earnings, beginning in the first quarter, and especially in the second, third and fourth quarters.
“The S&P IS NOT trading on Q4 numbers, but it IS trading on … estimates for Q3 and Q4 2021,” Nicholas Colas of DataTrek said in a recent note.
S&P 500 earnings per share (ests.)
- Q4: $36.88
- Q1 2021: $37.59
- Q2 2021: $40.39
- Q3 2021: $44.22
- Q4 2021: $45.28
Source: Refinitiv
Overall, earnings are expected to increase 25% in 2021, and that is just the current consensus. Many have considerably higher estimates.
The market is already partially reflecting these expectations. The S&P 500 rallied nearly 50% from its March 23 low to Nov. 2, the eve of the election, largely on the back of massive fiscal and monetary stimulus. It has rallied another 10% since the election, much of it on the belief that even more stimulus will be coming, as well as more incentives for clean energy investing.
“The market is set to see a substantial acceleration in earnings growth on better than expected operating leverage,” Mike Wilson of Morgan Stanley wrote in a recent note to clients.
“Operating leverage” is an accounting term that measures how a company can increase profit by increasing revenue.
Simply put, Wilson and other strategists are expecting that the cost-cutting efforts of corporate America in 2020 — reducing rent, eliminating jobs, and cutting travel — will dramatically improve the bottom line and will accelerate corporate profits even more when revenues are expected to increase in 2021.
More revenues plus lower expenses equals more profit.
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