NEW YORK (Reuters) – With uncertainties surrounding the US election fading, some investors expect corporate earnings and economic data to play a bigger role in the move in stock prices this year.
For months, earnings and economic data have largely taken second place as investors grappled with two general uncertainties and their ultimate impact on financial markets: the evolving political landscape in Washington and the coronavirus pandemic that has hit the globe.
Options data showed that betting on large earnings-related stock movements was only profitable 24% of the time in the last earnings season, compared to a historic win rate of around 40%, according to the analyst firm. of the ORATS options.
Shares rose to record highs even as Citigroup’s US Economic Surprise Index, which tracks economic data related to expectations, slipped to its lowest level in six months.
“In 2020, the fundamentals went out the window,” said Matt Amberson, director of ORATS.
Graphics: no surprises,
Some investors believe it is about to change. The Georgia Senate ballot resolution overturned control of the House to Democrats earlier this week. This has provided investors with greater clarity on the fiscal policies that will have a greater chance of being advanced in 2021, especially President-elect Joe Biden’s proposals to increase fiscal spending and higher taxes.
Congress certified Biden’s election victory early Thursday, hours after hundreds of supporters of President Donald Trump stormed the United States Capitol in a shocking spectacle that weighed only briefly on the markets.
“With less attention to politics, there is more bandwidth to focus on other issues like COVID and economic fundamentals,” said James Knightley, chief international economist at ING in New York.
Shares surpassed initial weakness to close at a record high on Friday, despite data showing that the US economy lost jobs for the first time in eight months due to a resurgence of COVID-19 infections.
Investors will get a snapshot of how the economy is going next week with the release of inflation, retail sales and consumer confidence data.
JP Morgan, Citigroup and Wells Fargo will release their fourth quarter results on January 15, among the first S&P 500 companies to publish their results for the final period of 2020 affected by the coronavirus.
Overall, the earnings of the S&P 500 companies are expected to increase by about 23% in 2021 compared to the 2020 pandemic, leaving investors to figure out just how sustainable of all this is.
Many are likely to be more insightful than last year, said Mohannad Aama, chief executive of Beam Capital Management.
Investors could have some degree of rotation, with companies whose businesses were hit by the pandemic in 2020 expected to show strong rebounds this year, analysts said.
The worst performing sector in 2020, energy, is Aama’s top pick for 2021. The sector is expected to record 668% earnings growth in 2021, according to I / B / E / S data. from Refinitiv.
Earnings growth for industry, consumer discretionary and materials are expected to far outstrip earnings growth for the tech sector, according to the data.
To be sure, expectations of fiscal stimulus and extremely low long-term interest rates fueled the “everything bounces back” that buoyed assets. from from big tech stocks to small caps, convincing some investors that betting on larger returns might be preferable to trying to be too selective. So far, that phenomenon has persisted into 2021, with the high-tech S&P 500 and Nasdaq both reaching new highs.
At the same time, investors could revert to the “home” trading that big tech stocks have benefited from if the coronavirus renaissance grows or the vaccine rollout goes wrong.
However, some investors believe a more refined approach may be the key to stock picking in 2021.
For most of 2020, “you had a market that didn’t care if a company lost earnings or ran into gains. All he cared about was stimulus and vaccines,” said Robert Almeida, portfolio manager and global investment strategist. at MFS Investment Management.
Now, “the market will be forced to refocus its focus on the micro versus the macro,” he said.
Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Dan Grebler