News: S&P 500 profit recession may end
For bulls anxious that stretched valuations in US stocks could imperil the current rally, the earnings season that picks up in earnest on Friday (15 January) may offer a tonic.
While profits from S&P 500 Index companies are projected to drop for a fourth straight quarter in the final period of 2020, the dozen companies that have already reported have trounced estimates to such an extent that the fourth quarter tally is on track to exceed the per-share figure from the same period in 2019.
That would halt a streak of contracting profits that reached two quarters as pandemic-fuelled restrictions devastated large parts of Corporate America. Big companies rushed to cut costs and cater to stay-at-home demand amid the virus outbreak, increasing online business.
A swift recovery in profits would validate bulls who have looked past surging virus cases to bet on an economic rebound amid vaccine rollout and government stimulus. Up 70% from the bear market trough in March, the S&P 500 is trading at 23 times forecast earnings, close to the highest multiples since the dot-com era.
S&P 500 companies managed to exceed analysts’ estimates by an average 21% in the previous two quarters but still saw profits trail the year-earlier period. So far, those that have released results this season have topped expectations by 14%.
Should the pace of positive surprises continue, the S&P 500’s per-share profits – which according to analyst estimates compiled by Bloomberg Intelligence fell by 8.5% to USD37.13 – would end up between USD42.33 and USD44.92. That would eclipse the USD42.01 that companies earned in the final quarter of 2019.
Better-than-estimated results are likely to set the stage for expectations to improve for this year and next, potentially making the S&P 500 look less expensive. Right now, analysts forecast the index’s profits to jump 23% this year, followed by another 17% increase in 2022. – Bloomberg News.
US stocks rose a second day Thursday amid optimism the economy will continue to benefit from government support. The S&P 500 Index added 0.23% to 3,809.84 and the Nasdaq Composite Index rose 0.43% to 13,128.95, but the Dow Jones Industrial Average slipped 0.03% to 31,060.47.
Europe equities rose for a second day as deal activity boosted some shares and investors prepared for the earnings season.
The Stoxx Europe 600 Index added 0.11% to 409.07 at the close. Spain’s Telefonica SA jumped after it sold its towers division, boosting telecoms, while French grocer Carrefour SA soared 13% following an approach from Alimentation Couche-Tard Inc. Banks and travel shares underperformed.
In Europe, as investors await a vaccine-led recovery, more restrictions could be imposed, with German Chancellor Angela Merkel warning that the country may need to extend its lockdown until Easter because of the risks posed by the fast-spreading UK strain. However, The European Central Bank (ECB) will maintain favourable monetary conditions for as long as needed, governing council member Francois Villeroy de Galhau said Wednesday (13 January).
The ECB’s latest projections for economic growth in the Euro Area are still “very clearly plausible” despite the resurgent coronavirus and latest lockdowns, President Christine Lagarde said on Wednesday. – Bloomberg News.
The Bank of Japan (BOJ) is likely to consider downgrading its economic assessment at a policy meeting next week (ending 22 January) following the declaration of a partial state of emergency to combat the latest virus wave, according to people familiar with the matter.
Prime Minister Yoshihide Suga announced an expansion of the state of emergency Wednesday (13 January) which put more than half the economy under voluntary restrictions. The economic impact of the moves will be a key topic at the two-day policy meeting ending on 21 January, the people said.
BOJ officials also see a possibility of the bank lowering its economic projection for the year ending in March because of the emergency, the people said. The BOJ’s current forecast is for a 5.5% contraction of gross domestic product. The Nikkei reported earlier Wednesday that the central bank was considering a lower projection. – Bloomberg News.
The Nikkei 225 Index shed 0.04% to 28,445.00 at the open on Thursday. It climbed 1.04% to 28,456.59 on Wednesday.
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