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Stock markets are likely to continue climbing, given the unexpectedly good US earnings reports
- Solid support will also come from the global vaccine roll-out and accommodative policies from central banks and governments, with non-US markets performing better
- Risks lie in the ability of companies to control costs as the economy improves and taxes and wages rise
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The market marches on. After some jitters caused by retail investors swarming around heavily shorted stocks, global equities have again found themselves on firmer ground. However, the regained market composure has not put to rest lingering questions about whether the market had got ahead of itself and priced in too much positivity.
These worries are touching nerves because of the unusual nature of the recession and the economic recovery. The disparity between the market and the economy is clear: economic expansion is at a relatively early stage but is accompanied by low bond yields, tight credit spreads and high equity market valuations that would normally appear much later in an economic cycle.
Yet, even with such a strong run, there are reasons to believe the markets will edge higher, including the global vaccine roll-out, the still-supportive policy stance of central banks and governments, and companies delivering stronger earnings growth.
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When it comes to earnings, companies are living up to and even beating consensus expectations, alleviating some concern about elevated metrics such as forward price-to-earnings ratios.
The US earnings season for the fourth quarter of 2020 is coming to a close. At the time of writing, companies in the S&P 500 Index representing 84 per cent of the market capitalisation had published their reports. While operating earnings were lower than a year ago, more than 80 per cent of companies were beating analysts’ expectations and earnings surprises were running at close to 20 per cent.
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Perhaps more importantly, vital signals can be gleaned from the guidance offered by company management. During the depths of the pandemic, corporate America was reluctant to give strong views on what would happen next, given the uncertainty. With vaccines now widely available, economies reopening and further fiscal stimulus coming, there is greater certainty about what will underpin the earnings outlook.
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