The US economy is riven by uncertainty, what with slowing jobless claims and climbing coronavirus infections. But one crucial indicator, which happens to be a major driver for stocks, is on the mend: corporate earnings.
Not that they are anywhere close to being in the black. The point is that they’re less bad than once feared. And that’s something, right?
Profits for the third quarter should only slump 17%, compared to the year-before period, according to a UBS report. If so, then that will be a big improvement on what had been forecast for the just-completed quarter: At mid-year, analysts expected a 26.5% drop, and then they revised that to 22.8%. For what it’s worth, the estimate now for the fourth quarter is for a mere 1.1% in the red.
The UBS projection would be a marked contrast to the 32.8% plunge in the second quarter this year. Certainly, 2020 has been a topsy-turvy time in the financial world due to the pandemic—although the economy has bounced back, to a degree, and the S&P 500 has recovered its spring losses.
“Earnings are coming in 23% better than expected,” wrote Mark Haefele, UBS’s CIO for global wealth management. That development, in turn, should support the equity rally, he added. For instance, this week’s earnings reports from JPMorgan Chase and Citigroup exceeded analysts’ expectations.
Such an upbeat take as UBS’s comes despite troubling unknowns, chiefly the fate of more federal stimulus, rising COVID-19 infections, and the ongoing presidential election drama.
In UBS’s estimation, investors are wise to take heart from the positives: rebounding auto sales, strong consumer goods and housing activity, and an uptick in industrial output. Around 85% of S&P 500 companies beat earnings in the troubled second quarter, Refinitiv data show.
To UBS, “the continued economic recovery from the pandemic will be the dominant market driver in 2021, with policy clarity, a new round of stimulus, and a successful vaccine helping propel the market higher.”
That said, not all the early reports are wonderful. Delta Air Lines booked a huge loss and said its operations won’t return to normal for two years. Bank of America had decent earnings, yet disappointed on a revenue drop.