A significant part of the global recovery in corporate profits – expected to pick up in Q1 2021 – is at risk of being pushed back further as coronavirus lockdowns and mobility restrictions in several countries dash hopes of a faster economic rebound, investment banks said.
China announced lockdowns in four cities and European countries unveiled stricter and longer coronavirus restrictions on Wednesday, undermining hopes of a return to normal and raising concerns of further economic damage in 2021.
Germany, the UK and the Netherlands have indicated that strict restrictions on COVID-19 will last in early February, and Italy has said it will extend its state of emergency until the end of April. Japan has also extended a state of emergency to Tokyo, hurting prospects for hosting an already delayed Summer Olympics.
In the United States, large stay-at-home orders were reinstated last month in California, the most populous state, as infections soared.
These actions have generally prompted words of caution from major investment banks and other market watchers.
“An additional wave of COVID is among the main risks to watch out for this year,” said Vincent Manuel, global CIO of Indosuez Wealth Management.
“Over the past two quarters, we have been in a trend of positive earnings momentum in both Europe and the US, which was coming from the value segments of the market. Now it is true that if we have any disruptions from COVID it would trigger negative revisions for the first quarter, but what matters even more is the ability to rebound in earnings in subsequent quarters.
Analysts’ earnings estimates for the first quarter also did not reflect the concern. Europe is expected to jump 40% in profits, while profits for US companies in the S&P 500 are expected to rise 16%, according to IBES data from Refinitiv. Estimated first quarter earnings growth for the S&P 500 is up slightly since January 1.
The business forecast for the first quarter and 2021 will be critical for investors in the coming weeks. This week marks the start of fourth quarter 2020 results for U.S. companies, with results from JPMorgan Chase and other major banks due on Friday.
“We see downside risks to the forecast this earnings season,” Bank of America equity strategist Savita Subramanian said Wednesday, pointing to a consensus on US earnings that indicates a decline of just 3% from pre-levels. COVID-19 in 2019..
“While further stimulus could pose upside risks, the rise in COVID cases suggests a lukewarm recovery from here.”
Cracks have appeared in expectations of a V-shaped earnings rebound, as the pace of upward revisions to global earnings estimates has slowed in recent weeks.
Many businesses are still troubled by the pandemic. Coca-Cola Co said last month it would cut 2,200 jobs worldwide, including 1,200 in the United States, due to the impact of the virus on the economy.
Still, U.S. and European companies saw earnings growth of 20.8% and 38% respectively for 2021, according to Refinitiv analysis based on MSCI indices.
Some US strategists believe the consensus forecast may be underestimating the expected recovery in the economy.
Jonathan Golub, chief U.S. equities strategist and head of quantitative research at Credit Suisse Securities, raised his 2021 targets on the S&P 500 last week, saying in a report that “the likely avalanche of pent-up consumer demand won’t can be ignored ”.
One of the main reasons for the optimistic outlook was vaccine deployments.
“There is widespread hope that a deployment of the COVID-19 vaccine in 2021 can normalize the underlying real economy and increase profits, jobs and margins,” said Steen Jakobsen, chief investment officer of the bank. Saxo investment.
“The risk is that new mutations in the virus will dilute our attempt to normalize our society with the first generation vaccine.”