Stock market skeptics, who fear running to historic highs to limit a tumultuous 2020 is fueled by an unwarranted round of investor euphoria, could overlook a major tailwind, according to Jefferies analysts.
The skepticism is understandable, they acknowledged in a note on Saturday, noting that the performance of the market heading towards the end of 2020 is “almost the polar opposite” of the double-digit declines observed in the fourth quarter of 2018, despite comments and the news stream with “similarly harsh tone”.
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S&P 500 SPX,
fell 14% in the last quarter of 2018, a sell-off triggered by fears that the Federal Reserve’s too tight monetary policy would stifle the economy. The benchmark has risen by more than 10% so far in the last quarter of 2020, despite growing cases of coronavirus threatening to derail an economic recovery even as vaccines are launched in the US and much of the world.
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Most fundamentally, stocks are related to future gains. And the “notable difference” in the last three months of 2020 is that earnings revisions for that period have been positive in almost every week of the quarter, analysts wrote.
“We would argue that this is one of the most important tailwinds for stocks, because earnings reviews are rarely positive,” they said.
Earnings revisions refer to changes in analysts’ estimates of corporate earnings in a quarter – in this case, for companies that make up the S&P 500. Expectations are usually revised lower over a quarter, effectively lowering the bar when the earnings season ends. course.
As the chart below shows, upward revisions have become a rare event. But history shows that stocks tend to follow up when they occur, analysts have noted.
Jefferies
How much tail wind? Analysts said the average three-month performance of the S&P 500 following positive reviews is nearly 450 basis points, or 4.5 percentage points, “which is good” for the S&P 500 in the first quarter of 2021. see table below).
Jefferies
And since vaccine implementations have just begun, the potential remains for further positive reviews in the first half of next year, they said.
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As the table above shows, even negative revisions, which are lower than average, tend to lead to solid performance by the S&P 500. In fact, it is only until revisions begin to roll back significantly that performance tends to slow. analysts found.
So full of steam for 2021? Not so fast.
Analysts said the magnitude of strong market gains in December, which saw the S&P 500 grow by more than 3% in the month to date, while the Dow Jones Industrial Average DJIA,
advanced by about 2.8%, and Nasdaq Composite COMP,
gained more than 5.5%, could lay the groundwork for a brief January retreat.
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“The current performance in December is about 50 basis points above the average of the ’90s, and when this happens the performance in January is positive only about half the time,” they noted. However, in these cases, the performance in the first quarter was stronger than usual, with the S&P 500 rising more than 80% of the time.
“So while [near-term] yields could be poor, it could also be a good time to increase exposure, “they said.