RPT-Wall St Week Ahead-As political risk wears off, profits may start to matter again

(Repeat column originally posted on January 8, no change)

NEW YORK, Jan.8 (Reuters) – With uncertainties over the U.S. election subsiding, some investors expect corporate earnings and economic data to play a bigger role in how stock prices move this year .

For months, economic results and data have largely taken a step back as investors grapple with two overarching uncertainties and their ultimate impact on financial markets: the changing political landscape in Washington and the sweeping coronavirus pandemic. the world.

Options data showed that bets on large earnings-related stock movements were only profitable 24% of the time in the last earnings season, compared to a historic win rate of around 40%, according to the option analysis company ORATS.

Shares hit record highs even as Citigroup’s U.S. Economic Surprise Index, which tracks economic data relative to expectations, slipped to its lowest level in six months.

“In 2020, the fundamentals have kind of gone out the window,” said Matt Amberson, director of ORATS.

Some investors believe this is about to change. The Georgia Senate second-round resolution shifted control of the chamber to Democrats earlier this week. This has given investors more clarity on the fiscal policies that are more likely to be brought forward in 2021, namely President-elect Joe Biden’s proposals for increased tax spending and higher taxes.

Congress certified Biden’s election victory early Thursday, hours after hundreds of supporters of President Donald Trump stormed the U.S. Capitol in a shocking display that only briefly weighed on markets.

“With less emphasis on politics, there is more bandwidth to focus on other issues such as COVID and economic fundamentals,” said James Knightley, chief international economist at ING in New York. .

Stocks overcame early weakness to close at a record low on Friday, despite data showing the U.S. economy shed jobs for the first time in eight months amid a resurgence in COVID-19 infections.

Investors will get a snapshot of the economy’s performance next week with the release of data on inflation, retail sales and consumer confidence.

JP Morgan, Citigroup and Wells Fargo are expected to release fourth quarter results on Jan.15, among the first S&P 500 companies to release results for the final coronavirus-hit period of 2020.

Overall, S&P 500 profits are expected to increase by around 23% in 2021 from the pandemic-stricken 2020, leaving it up to investors to determine how sustainable this is.

Many will likely be more perceptive than they were last year, said Mohannad Aama, chief executive of Beam Capital Management.

Investors could have some degree of turnover, companies whose operations were affected by the pandemic in 2020 are expected to post strong rebounds this year, analysts say.

The worst performing sector in 2020, energy, is Aama’s top choice for 2021. The sector is expected to post profit growth of 668% in 2021, according to I / B / E / S data from Refinitiv.

Growth in industrials, consumer discretionary and materials earnings is expected to far outpace tech sector earnings growth, the data shows.

To be sure, expectations of a fiscal stimulus and extremely low long-term interest rates have fueled ‘any rebound’ that has supported assets from large tech stocks to small caps, convincing some investors that it is better to bet on gains. broader than trying to be selective. So far, this phenomenon has persisted through 2021, with the state-of-the-art S&P 500 and Nasdaq both reaching new heights.

At the same time, investors may return to the ‘stay at home’ trade that has benefited big tech stocks if the coronavirus resurgence develops or the vaccine rollout goes awry.

Still, some investors believe that a more refined approach may be key to stock picking in 2021.

For most of 2020, “you had a market that really didn’t care if a business was missing out or seeing a profit. All that mattered was the stimulus and the vaccines, ”said Robert Almeida, portfolio manager and global investment strategist at MFS Investment Management.

From now on, “the market will be forced to reorient its focus on the micro versus the macro,” he said.