Wall Street Week Ahead: With stocks at record highs, investors look to
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[April 10, 2021] By
NEW YORK (Reuters) - Wall Street is kicking
off a crucial reporting season as U.S. companies provide quarterly
results a year after the coronavirus pandemic crippled the economy and
as investors look for reasons to support a stock market at record highs.
Results begin in earnest next week with major banks. Overall S&P 500
earnings are expected to have jumped 25% in the first quarter from a
year ago, according to IBES data from Refinitiv.
That would be the biggest quarterly gain since 2018, when tax cuts under
former President Donald Trump drove a surge in profit growth.
With the S&P 500 index at record highs, valuations are stretched heading
into the season, leaving some investors looking to earnings for further
"We've seen earnings estimates go up, but... when you look at the market
price as a multiple of those forward earnings, it has stayed pretty
steadily at around 22 times," said Brad McMillan, chief investment
officer at Commonwealth Financial Network.
"If we're going to see significant moves going forward, it's going to
come from earnings."
The S&P 500 was trading at 22.3 times forward earnings as of Friday
compared with a long-term average of about 15, based on Refinitiv's
Early quarterly results have been strong. Strategists say that bodes
well for the rest of the season, and it could be a sign that results may
exceed already high expectations.
The 20 S&P 500 companies that reported earnings as of Thursday topped
analyst estimates by 11% on average, said Nick Raich, chief executive of
The Earnings Scout, an independent research firm. That is about 1.5
times the average for those companies over the last three years and
about triple the longer-term average, he said.
Another positive sign is that estimates overall have been rising heading
into the earnings period. Estimates typically drop ahead of a reporting
period after companies give conservative outlooks.
At the start of March, analysts expected first-quarter S&P 500 earnings
growth of 22%, based on Refinitiv data.
Still, some fear that investors will be disappointed after the sharp run
up in earnings expectations, which could dent stock prices after a
months-long rally led by economically sensitive groups including energy
Investors have bet that these stocks are the most likely to benefit from
the reopening of the U.S. economy.
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A sign for the Wall Street subway station is seen in the financial
district in New York City, U.S., August 23, 2018. REUTERS/Brendan
McDermid/File Photo/File Photo
For all of 2021, S&P 500 earnings growth is expected to be 26.5% versus a
decline of 12.6% last year.
One risk to future earnings is the threat of U.S. President Joe Biden's
corporate tax hikes from their current 21%. A 28% tax rate would take 7.4% off
S&P 500 companies' earnings per share, according to UBS.
BANKS UP FIRST
Two sectors to watch are financials and materials, McMillan said, noting: "If
businesses are starting to grow again, they're going to need to borrow money."
Financials are expected to show one of the biggest earnings gains, up 75.6%
year-on-year, while materials are seen up 45.4%.
JPMorgan Chase is due to report Wednesday, and results from other big banks are
also due during the week. The banks are expected to produce astounding
bottom-line profit increases from a year-ago as they release funds held aside
for potential loan losses and perhaps report a record quarter for capital
Financials were one of the best performers in the first quarter, with the S&P
financial index up 15%, while the energy sector led S&P 500 sector gains in the
first quarter, rising 29%. Technology was one of the worst-performing sectors,
rising just about 2% in the quarter.
Investors also may be looking to see whether "stay-at-home" companies and other
technology-related names that performed well early in the pandemic can sustain
Technology shares in recent sessions have begun to outperform more economically
Investors are optimistic companies will offer more guidance now after being
reluctant give projections at the start of the pandemic.
"We'll probably see more companies giving outlooks," said Tim Ghriskey, chief
investment strategist at Inverness Counsel in New York. "That will give the
market a lot of confidence."
(Reporting by Caroline Valetkevitch, additional reporting by Lauren Tara LaCapra;
editing by Megan Davies and David Gregorio)
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