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Market strategists earn their coin by scanning the equity market’s vital signs. One of these is the trend of analysts’ earnings estimates. After the 2020 pandemic-induced collapse, experts anticipate earnings per share bounces of up to 70 per cent in the US and Europe. Imbued with confidence about this outlook, these market oracles have begun urging their clients to buy any price dips.
Here is why. Corporate earnings forecasts have perked up since Covid-19 vaccines were first announced in November. Fears of mutant virus strains have so far had little impact. US earnings continue to outpace recoveries elsewhere led by some of the pandemic’s biggest beneficiaries, the technology sector.
Tech benefited from an accelerated secular shift online, for work and leisure. However, as economic activity picks up, more typical cyclical drivers should return in force as well. The share of upgrades for tech groups was the highest since September 2009 when a previous economic recovery began.
But there are other industries doing well. Trainer shop JD Sports, clothing group Asos and UK-listed miners are some of the groups that have said earnings in the past year will be better than previously expected. US banks Wells Fargo, Citigroup and JPMorgan Chase have been subject to some of the biggest increases in recent analysts’ expectations.
This earning rebound is not purely flattered by a depressed base. For the nine largest US stocks by market value, which have surpassed their pre-pandemic earnings, earnings this year should jump 25 per cent, according to strategist Jonathan Stubbs at Berenberg. For equivalent European stocks, that figure is 14 per cent.
Analyst forecasts exhibit little contrarianism. In Europe, for example, travel and leisure earnings this coming year should end up 80 per cent below where they started in 2020, as will oil and gas earnings at 40 per cent down. Miners, given last year’s strong surge in metals prices, look a better bet than European tech.
Deep distortions in financial markets will start to fade once the worst impacts of the pandemic do likewise. A return to normalcy should expose those companies that without unprecedented government support would have struggled.
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