As political risk fades, earnings may start to matter again
With uncertainties regarding U.S. elections fading, some investors expect company earnings and economic data to play a greater role in moving stock prices this year.
For months, earnings and economic data have largely taken a backseat as investors grappled with two overarching uncertainties and their ultimate impact on financial markets: the changing political landscape in Washington and the coronavirus pandemic sweeping the globe.
Options data showed that bets on large earnings-related stock moves were profitable only 24% of the time in the last earnings season, compared with a historical win rate of about 40%, according to options analytics firm ORATS.
Stocks have surged to record highs even as Citigroup’s U.S. Economic Surprise Index, which tracks economic data relative to expectations, has slipped to its lowest level in six months.
“In 2020, the fundamentals kind of went out the window,” said Matt Amberson, principal at ORATS.
Some investors believe that is about to change. The resolution of the Georgia Senate runoffs tipped control of the chamber to Democrats earlier this week. That gave investors more clarity on fiscal policies that will have a greater chance of being advanced in 2021, namely, President-elect Joe Biden’s proposals for increased fiscal spending and higher taxes.
Congress certified Biden’s election victory early on Thursday, hours after hundreds of President Donald Trump’s supporters stormed the U.S. Capitol in a shocking display that weighed only briefly on markets.
“With less focus on politics, there is greater bandwidth for focusing on other issues such as COVID and economic fundamentals,” said James Knightley, chief international economist at ING in New York.
Stocks overcame early weakness to close at a record high on Friday despite data showing the U.S. economy shed jobs for the first time in eight months amid a resurgence of COVID-19 infections.
Investors will get a snapshot of how the economy is performing next week with the release of data on inflation, retail sales and consumer sentiment.
JP Morgan, Citigroup and Wells Fargo are set to release fourth-quarter results on Jan. 15, among the first S&P 500 companies to post their results for the last period of coronavirus-stricken 2020.
Overall, S&P 500 company earnings are forecast to increase about 23% in 2021 compared with pandemic-hit 2020, leaving investors with the task of figuring out how much of that is sustainable.
Many are likely to be more discerning than they were last year, said Mohannad Aama, managing director at Beam Capital Management.
Investors may be in for a certain degree of rotation, with companies whose businesses were battered by the pandemic in 2020 expected to show strong rebounds this year, analysts said.