Though stocks rise and fall on news every day, over the long term it is company profits or earnings that are the ultimate driver of stock prices. Last year profits dropped substantially when the economy was shut down, but then rebounded significantly in the third quarter. JP Morgan, one of the Portfolio Strategies we utilize for client accounts, wrote this today about fourth quarter earnings…
As the fourth quarter earnings season comes to an end, we are projecting operating earnings per share (EPS) of $35.15, down 10.3% from a year ago. In all, 81% of companies have beaten earnings estimates, and 68% of companies have beaten revenue estimates. Technology and health care companies continue to see profits rise, with year-over-year EPS growth of 27.2% and 8.8%, respectively. At the other end of the spectrum, energy and industrials are projected to end the quarter with significant EPS contractions, which come as no surprise given the drop in oil prices and pullback in air travel and transportation. However, this story is evolving. Financials, which came under severe pressure in 2020, have showed signs of recovery as declining NIMs level out and credit metrics improve. Likewise, consumer discretionary is set to end 2020 on a positive note, with the sector’s EPS currently projected to grow 3.0% year over year. Looking ahead, we expect both sectors, as well as the cyclical parts of the market more broadly, to see earnings growth outpace their growth counterparts in 2021. That said, while an economic recovery will boost earnings in 2021, investors should recognize that an overly rapid recovery could very well lead to strong wage growth, thereby weighing on margins and profits in 2022.
