Fourth-quarter earnings season is in the home stretch and it’s been a good one. Based on what we've learned from corporate America in the past three weeks, earnings could continue to rebound strong in 2021.
Outstanding Numbers in the Fourth Quarter
Coming into fourth-quarter earnings season, investors had plenty of reasons to expect that companies would deliver better-than-expected results. The US economy grew at a solid 4% annualized pace in the fourth quarter (source: Bureau of Economic Analysis GDP data). Strong manufacturing surveys signaled better earnings ahead. Analysts’ earnings estimates rose during the quarter, as companies issuing fourth-quarter guidance mostly raised expectations.
Now that most numbers are pretty much in the books (93% of S&P 500 companies have reported results), it’s clear that optimism was warranted as earnings impressively grew during the quarter [Figure 1].
Here are the impressive numbers:
These results were particularly impressive given the wave of COVID-19 that brought some new targeted restrictions late last year.
Bar Raised Again
Not only did corporate America deliver big upside to estimates—but their outlooks for 2021 were positive enough to drive a sizable increase in estimates. As shown in Figure 2, since the start of fourth quarter on October 1, 2020, estimates for 2020 and 2021 have increased significantly.
These increases in estimates may be a sign of better earnings ahead. The economic recovery has continued to surpass expectations. More stimulus—a lot more—is likely coming soon, which could drive US GDP growth above our forecast of 5—5.5%.
We see two risks to 2021 earnings. First, earnings tend to fall short of the consensus estimate in most years, though this year may be different given the unique circumstances. Second, COVID-19 still carries risks and we’d like to see further progress toward ending the pandemic. We do see upside if all goes according to plan.
Reiterating Positive Stock Market Outlook
Our confidence in the economic recovery continues to grow, bolstered by vaccine distribution, and fiscal and monetary stimulus. We anticipate a strong earnings rebound will enable stocks to grow into their elevated valuations, even if interest rates move a bit higher from here. Markets may still be underestimating the potential for pent-up demand to drive a sharp rebound in activity during the spring and summer as the economy fully reopens. So while a pickup in volatility would be normal at this stage of a strong bull market, we think suitable investors may want to consider "buy the dip" opportunities as they arise.
If you have questions about your investments or have other financial planning needs, we encourage you to Contact Us to speak with your financial advisor.
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