After the stock surge, investors ask companies what to expect

An epic stock rally faces a key test in the coming weeks, as investors learn what executives expect from earnings and income in the periods ahead.

The fourth quarter earnings season kicked off on Friday with better-than-expected earnings from some of the nation’s biggest banks. Despite record quarterly earnings at JPMorgan Chase & Co. and some bright spots at Citigroup Inc. and Wells Fargo, shares of all three fell, with Wells and Citi each falling more than 6%.

Market reaction highlights the issues as large companies begin to share their quarterly results and, more importantly, their outlook for the quarters ahead. While the results weren’t terrible, stocks were hit hard, reflecting rising investor expectations as bank stocks climbed more than 10% for 2021 heading into Friday’s session.

Major indices skyrocketing to new highs this year, despite an accelerated toll of the coronavirus and questions about how it will affect the economic outlook, underlines the pressure on big business executives to explain how they expect for results to improve in 2021. Soft earnings during the S&P’s roughly 70% rise from last March’s intraday low were deemed acceptable by investors as many expect a sharp rebound this year. Companies with insufficient projections can expect to be punished, they say.

“Whether they had a good quarter or not, it all depends on what happens next,” said Kimberly Woody, senior portfolio manager at Globalt Investments, which manages $ 1.9 billion. “Good news for the future has been incorporated into this market.”

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With the books closed in 2020, analysts estimate the profits of S&P 500 companies fell 13% for the year, according to FactSet. Even so, companies in the S&P 500 traded Thursday at 22.65 times their projected profits over the next 12 months, above a five-year average of 17.84, according to FactSet.

Dozens of major companies are expected to report this week, including transport company JB Hunt Transport Services Inc., healthcare giant UnitedHealth Group Inc., oil services company Halliburton Co. and semiconductor maker Intel Corp. .

S&P 500 earnings are expected to have fallen 6.8% in the fourth quarter from a year earlier, a marked improvement from the 32% collapse in the second quarter, but not the kind of performance that typically inspires stock market records. Earnings estimates have risen since the start of the quarter, and some investors expect the current forecast to be a low bar for companies to cross.

Stock buyers expect more than a year of profits, and many investors say the market has advanced despite the damage in 2020 due to a widely held belief that vaccines will help put the pandemic back into the past , allowing companies to recover.

“I think the market is very attentive to the pandemic, and that’s why we see it continue to increase,” said Greg Marcus, CEO of UBS Private Wealth Management.

And this despite worrying signs of how the pandemic recently took its toll on the economy: employers cut 140,000 jobs last month, ending seven months of job growth, and retail sales in states United fell in December for a third consecutive month.

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S&P 500 earnings are expected to return to year-over-year growth in the first quarter, up 17% and then 46% in the second quarter. And economists have raised their forecasts for US economic growth in light of vaccinations and Washington’s potential for additional help for households and businesses.

Stocks that tend to be tied to the outlook for the economy have been performing well lately. Since the start of the fourth quarter, the financial sector of the S&P 500 has grown 28%, while the materials group has gained 19%. The tech sector, which led the benchmark in 2020, is up 9.1% over that period.

In December, US Bank Wealth Management increased its stakes by buying shares of mid-sized US companies, said Lisa Erickson, head of the traditional investment group.

“As we continue to see progress on the economic front with the vaccine – and to see that companies continue in a difficult environment in 2020 – it has really given us confidence that, as of this year, the areas that have been more leveraged for the reopening would be able to outperform, ”she said.

Profit expectations suggest a clearer picture for some of these cyclical groups. The materials sector of the S&P 500 is expected to post the best earnings growth in the fourth quarter, up 8.6%. Profits of financial companies are expected to rise 3.5%, a marked improvement from the 24% drop expected in late September.

Among the S&P 500 companies that reported profits, most beat expectations. These include homebuilder Lennar Corp., which reported higher profits as low borrowing costs and changes in housing preferences boosted demand for homeownership.

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Some investors are hoping business executives will shed light on the pandemic-induced changes in consumer spending habits that may outlast vaccines.

“We think some of the spending changes are sensitive in nature,” said Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Company. “When you buy a pet, that’s over 12 months of enrollment in terms of spending you’re going to have on animal related products.”