Stocks started today’s session lower with European indices down by 0.5 to 0.9 per cent and US index futures also drifted in the negative territory as President-elect Joe Biden’s $1.9 trillion pandemic relief plan failed to cheer investors. Sentiment was also partially hurt by news Pfizer was modifying its operations to provide more vaccines this year which it said will negatively impact on vaccine shipments in late January to early February. Reports that Italy was set to tighten its restrictions further also weighed on stocks, as investors were reminded that we are far from going back to normal life.
However, despite Friday’s weakness, sentiment remains overall positive towards stocks and other risk assets. Investors are betting that with the roll out of vaccines, we are heading towards normal times eventually and are thus largely ignoring the short-term risks posed by the growing Covid cases, and virus-related deaths and lockdowns. Investors know full well that central banks have got their backs. Jay Powell reminded investors that the Federal Reserve is not going to begin winding down its asset purchases later this year and that it is far from considering an exit from its ultra-loose monetary policies. Similar comments have also been made by a couple of other Fed officials and other global central banks heads.
So, don’t be surprised if the markets were to resume higher, especially heading into the fourth quarter reporting season. It is a promising sign that many companies in the S&P 500 have revised up their earnings guidance and sales forecasts. Analysts are expecting an average 2.3% earnings growth in Q4, which, if met, would mean a second consecutive quarter of earnings-per-share growth after a +4.1% rise in the third quarter.
While actual earnings will, of course, matter, the stock market is forward-looking. So, outlook for future earnings from company CEOs will be equally if not more important than the actual results. There is some uncertainty about a higher tax regime under Biden’s administration, while inflationary concerns are also on the rise amid all the stimulus programmes. However, it is also possible company leaders will provide optimistic forecasts due to pent up demand – especially in the service sector.
So, the upcoming earnings results and guidance could have a larger-than-usual impact on the wider markets this reporting season. Overall, I can’t help but feel companies will want to sound optimistic about the future and that’s exactly what the markets have been pricing in. Therefore, the stock market rally could continue for a while yet, before we see a meaningful correction.
Indeed, with the S&P being so close to its record high hit just last week, I can’t be too bearish from a technical perspective either – not until the index starts to break down some key support levels and these trend lines:
Source: ThinkMarkets and TradingView.com