This has been a good year for stocks, despite the sharp coronavirus-inspired February–March drawdown. The S&P 500 closed Friday up 14.8% for 2020 thus far. Just don’t expect much more than a 5% advance next year, warns Moody’s.
How come? Because the market has mostly already priced in next year’s improved earnings, wrote John Lonski, chief economist at Moody’s Capital Markets Research.
“The upside for 2021 has already been reduced by the presumptive pricing-in of good news regarding 2021 corporate earnings,” he declared. He added that next year, “the investment performance of US equities and corporate bonds will be uninspiring at best.”
Earnings have struggled in 2020, and FactSet estimates that they will have contracted 13.6% for the year—but will spurt up 22.1.% next year. If that occurs, wrote John Butters, FactSet’s senior earnings analyst, it would be the largest annual hike since 2010 (39.6%).
Higher bond yields also will “subtract from the relative attractiveness of equities,” Lonski argued. And those higher yields are coming. The 10-year Treasury has risen to 0.94% from o.5% in the summer.
This is happening despite lower volumes of newly issued corporate paper expected up ahead: Companies issued a record amount of bonds this year to gird themselves for a possible economic catastrophe and to take advantage of low interest rates. (Investment grade corporate bonds rose 53% in dollar terms, to $1.4 trillion.) Ordinarily, a smaller supply should lead to higher bond prices and lower yields. But there will be an abundance of new Treasury bonds.
Plus, other forces are at work. less-risky business climate and a small increase in expected inflation should push up 10-year Treasury yields to an estimated 1.2% from the current 0.9%, the economist indicated. The higher Treasury yields rise, the more stock valuations can fall.
Certainly, bullish calls for the market abound for 2021. JPMorgan, for instance, forecasts that the S&P 500 could climb 25%. Trouble is, market projections have a way of falling flat. In December 2019, the consensus was that stocks would rise 2.7% this year. Right now, they are up five times as much. Since 2000, according to Bespoke Investment Group, the median Wall Street analyst forecast was for a 9.5% market rise in the coming year. Actual figure: 6%.
At the moment, the odds of a spring-back for the economy are based on widespread optimism that the vaccines being deployed will wipe out the coronavirus. Consumers (if they’re not among the legions of unemployed, that is) and corporations are sitting on bushels of cash saved up during the pandemic.
While the stock market is not the economy, the consensus for gross domestic product (GDP) growth is 4% for 2021. That’s above what we’ve seen in recent years. We’ll soon see if that relatively sunny view plays out in share prices in the months ahead.