Investors are looking to upcoming US earnings with a 2021 outlook

Caroline Valetkevitch

NEW YORK (Reuters) – Investors will anxiously wait to see whether upcoming quarterly reports and forecasts from U.S. companies will confirm expectations for a strong rebound in profits and the economy in 2021, which was devastated by the coronavirus pandemic last year.

US stock markets rose to record highs, helped largely by optimism that the rollout of Covid-19 vaccines will enable economic recovery, while markets also boosted hopes for greater fiscal stimulus under US President-elect Joe Biden.

Earnings reports for the final quarter of 2020 begin this week with the release of results from JP Morgan, Citi and other major banks.

Earnings for S&P 500 companies are expected to decline 9.8% in the fourth quarter from a year ago, according to IBES data from Refinitiv.

However, profits are expected to rebound this year, with growth of 16.4% forecast for the first quarter. This forecast has improved since the fall, with S&P 500 earnings expected to increase 23.6% in 2021, based on easy comparisons to 2020.

Investors may be even more interested in what company executives say about 2021 than in fourth-quarter results, which come as virus cases surge in the United States and Europe.

“Management and analysts will really be focused, not necessarily in the rearview mirror. They are really looking at 2021,” said Kenneth Leon, research director at CFRA Research.

Also key will be “the pulse of each sector and how that affects investors in terms of thinking whether there is compelling value there or whether they might need a breather,” Leon said.

The S&P 500 trades at 22.7 times forward earnings, well above its long-term average of about 15, based on Refinitiv data.

“Stocks are already reflecting a pretty positive earnings outlook,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

Energy is expected to grow in the fourth quarter, based on Refinitiv data <.SPNY> and industry <.SPLRCI> had the largest year-over-year percentage decline in earnings among S&P 500 sectors.

While economically sensitive sectors such as these have outperformed the broader market in recent months, they still lag in 2020 technology terms, and their valuations are generally seen by some as cheaper than other sectors.

At the same time, the materials sector, which is also an economically sensitive sector, is expected to see the highest percentage increase in profits, followed by technology.

A large portion of cyclical names fall into the “value” category, and investors watched the Russell 1000 Value Index close the gap from the Russell 1000 Growth Index following upbeat vaccine news.

As virus cases continue to rise, many strategists expect a larger recovery to occur in the second half of the year.

“The outlook for the second half is likely to improve as corporates gain clarity and ultimately confidence,” Lindsey Bell, chief investment strategist at Ally Invest, wrote in a report on Friday.

But the uncertainty surrounding the economic recovery makes it even more important to get information from companies at this stage, even if it’s not “formal” guidance, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

“This is important for a market that wants to recover,” she said after a difficult year.

(Reporting by Caroline Valetkevitch; additional reporting by Lewis Krauskopf; editing by Alden Bentley, Cynthia Osterman and David Gregorio)