I’m Still Bullish As Ever… Here’s Why
Shah Gilani|January 11, 2021
What a week it was – and I mean for markets.
The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite notched new record highs on Friday, and the Russell 2000 made its mark the day before.
Last week’s message wasn’t so much “so what,” as it was “spend, spend, spend” because that’s what markets were focused on.
The Democrat-controlled Senate, House, and Executive branch are expected to unleash a tsunami of spending that investors expect will include helicopter money dropped into Americans’ bank accounts, a lot of which will end up being moved into their brokerage accounts, spending on infrastructure, the environment, the economy… You name it, and there will be money thrown at it.
That’s what drove markets higher last week. And there’s no reason they can’t keep on rising.
Here’s what I mean…
Optimism is Propelling Us Forward
And while there’s no reason that the markets can’t keep rising, that doesn’t mean they’ll keep going straight up this week. Though I wouldn’t be surprised if investors and traders shrugged off some skepticism early on and did just that.
What’s about to focus investors is the thing that matters most (after spending expectations, that is): I’m talking about earnings.
Q4 earnings start coming out this Friday, and that’s where everyone’s immediate focus will be.
Typically, analysts knock down earnings expectations and estimates before reports start coming out.
Over the last 10 years, they’ve been knocked down 4.2% on average, according to FactSet. And earnings have beaten by 4% on average across all those quarters.
But for Q4 2020, earnings expectations were raised by 2.3% for the S&P 500; they are now expected to come in at $37.06 for the quarter. Q3 earnings were $38.41, so Q4 earnings at $37.06 would be a step down from Q3 – something that rarely ever happens because Q4 encompasses holiday spending and is almost always expected to produce higher net earnings than Q3.
The bump up in Q4 expectations, though they’re less than Q3 earnings, is a sign of optimism.
Markets need to see confirmation that optimism is justified because, based on earnings estimates, the S&P 500 is trading at a rich 23 times 2021 earnings, which means investors want to see Q4 earnings come out better than expected, so 2021 has momentum going into the first quarter.
That’s a lot to ask, but it’s not impossible.
This week will be about expectations management, while the next few weeks will be about confirmation or capitulation.
Your Capital Wave Forecast is for a “sloppy” week this week, with a bias towards higher prices as momentum from last week should be enough to keep markets buoyant, even if they’re sloppy.
Then the real fun starts.
Sincerely,
Shah
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