By Karen Langley
An epic stock rally faces a key test in coming weeks as
investors learn what executives expect for profits and revenues in
coming periods.
Fourth-quarter earnings season kicked off in earnest Friday with
better-than-expected profits from some of the nation's largest
banks. Despite a record quarterly profit at JPMorgan Chase &
Co. and some bright spots at Citigroup Inc. and Wells Fargo &
Co., shares of all three declined, with Wells and Citi each
dropping more than 6%.
The market reaction highlights the stakes as large firms begin
sharing quarterly results and, more important, their outlooks for
coming quarters. Though results weren't terrible, shares were hit
hard, reflecting the rise of investor expectations as bank shares
climbed more than 10% for 2021 heading into Friday's trading.
The surge of major indexes to new highs this year, despite an
accelerating toll from the coronavirus and questions about how that
will affect the economic outlook, underscores the pressure on
executives at major companies to spell out how they expect results
to improve in 2021. Soft earnings during the S&P's roughly 70%
rise from last March's intraday low have been deemed acceptable by
investors because many expect a sharp rebound this year. Firms
whose projections fall short can expect to be punished, they
say.
"Whether they had a good quarter or not, it's all about what's
next," said Kimberly Woody, senior portfolio manager at Globalt
Investments, which manages $1.9 billion. "Good future news has been
priced into this market."
With the books closed on 2020, analysts estimate that profits
for companies in the S&P 500 fell 13% for the year, according
to FactSet. Even so, companies in the S&P 500 traded Thursday
at 22.65 times their projected earnings over the next 12 months,
above a five-year average of 17.84, according to FactSet.
Dozens of big companies are scheduled to report this week,
including transportation firm J.B. Hunt Transport Services Inc.,
health-care giant UnitedHealth Group Inc., oil-field services
company Halliburton Co. and semiconductor maker Intel Corp.
Earnings for the S&P 500 are projected to have fallen 6.8%
in the fourth quarter from a year earlier, a sharp improvement from
the second quarter's 32% collapse but not the kind of performance
that typically inspires stock-market records. Profit estimates have
crept higher since the quarter began, and some investors expect the
current forecasts are a low bar that companies will clear.
Purchasers of stocks are counting on more than a year's worth of
earnings, and many investors say the market has advanced despite
the damage of 2020 because of a widely held belief that vaccines
will help put the pandemic in the past, allowing business to
recover.
"I think the market is very much looking through the pandemic,
and that's why we see it continuing to drift higher," said Greg
Marcus, managing director at UBS Private Wealth Management.
That is despite troubling signs about how the pandemic has
recently weighed on the economy: Employers cut 140,000 jobs last
month, ending seven months of job growth, and U.S. retail sales
fell in December for a third consecutive month.
Earnings for the S&P 500 are expected to return to
year-over-year growth in the first quarter, rising 17%, and then to
climb 46% in the second quarter. And economists have raised their
forecasts for U.S. economic growth in light of vaccinations and the
potential for additional aid from Washington for households and
businesses.
Stocks that tend to be tied to prospects for the economy have
performed well lately. Since the start of the fourth quarter, the
S&P 500's financial sector has advanced 28%, while the
materials group has gained 19%. The technology sector, which led
the benchmark index in 2020, is up 9.1% over that time.
In December, U.S. Bank Wealth Management increased its
stockholdings by buying shares of midcap U.S. companies, said Lisa
Erickson, head of the traditional investments group.
"As we continue to see progress on the economic front with the
vaccine -- and seeing that companies were holding their own in a
difficult environment in 2020 -- that really gave us the confidence
that, going into this year, areas that were more leveraged to the
reopening would be able to outperform," she said.
Earnings expectations hint at a brightening picture for some of
these cyclical groups. The S&P 500's materials sector is
predicted to show the best fourth-quarter earnings growth, rising
8.6%. Earnings at financial companies are expected to rise 3.5%, a
sharp improvement from the 24% slump forecast at the end of
September.
Among the S&P 500 companies that have reported earnings,
most have beaten expectations. Those include home builder Lennar
Corp., which reported higher profit as low borrowing costs and
shifts in housing preferences drove demand for homeownership.
Some investors are hoping that corporate executives will shed
light on which pandemic-fueled changes to consumer-spending habits
might outlast the vaccines.
"We think that some of the spending changes are sticky in
nature," said Matt Stucky, portfolio manager at Northwestern Mutual
Wealth Management Company. "When you get a pet, that's more than a
12-month sign-up in terms of what spending you're going to have on
pet-related products."
Write to Karen Langley at karen.langley@wsj.com
(END) Dow Jones Newswires
January 17, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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