By John Persinos
I'm partial to grade-B science fiction horror movies. The daily news headlines are starting to resemble these flicks, but without the unintentional humor.
Reports surfaced this week from the United Kingdom that the coronavirus has mutated into a strain that's considerably more contagious. In alarmist language straight from a sci-fi potboiler, public health officials are warning that the mutant strain is "out of control."
As if we don't have enough to worry about.
After hitting new highs last week, the three major U.S. stock market indices took a breather Monday and closed mixed. The Dow Jones Industrial Average rose 37.40 points (+0.12%), the S&P 500 fell 14.49 points (-0.39%), and the tech-heavy NASDAQ Composite fell 13.12 points (-0.10%). In pre-market futures trading Tuesday, stocks were following the same mixed pattern.
However, the stock market is not the economy. The market is forward looking and it's already looking past our current woes to focus on the expected return to growth in 2021.
Despite the grim news about COVID-19, we're enjoying considerable tailwinds. Congress finally passed new fiscal stimulus this week, with the incoming Biden administration vowing to push for yet another round of stimulus in 2021.
The rollout of new coronavirus vaccines also is cheering investors. If COVID has morphed into a more virulent strain, these vaccines will be all the more important.
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Another bright spot is corporate earnings. Stock prices are bets on future corporate profit growth and on that score, investors should feel confident.
According to research firm FactSet, the estimated earnings decline for the fourth quarter of 2020 for the S&P 500 is -9.7%.
If -9.7% is the actual decline for the quarter, it will mark the third-largest year-over-year decline in earnings reported by the index since Q3 2009. However, on September 30, the estimated earnings decline for Q4 2020 was -12.8%. Eight sectors currently have smaller earnings declines or higher earnings growth rates, compared to September 30, because of upward revisions to earnings estimates.
The earnings picture is expected to get considerably brighter next year. The estimated year-over-year earnings growth rate for the S&P 500 for calendar year (CY) 2021 is 22.1%, which is above the 10-year average annual earnings growth rate of 10.0% (see the following chart).
If 22.1% is the actual growth rate for the year, it will mark the largest annual earnings growth rate for the index since CY 2010 (39.6%). The unusually large growth rate can be attributed to both an easy comparison to dismal earnings in CY 2020 (due to the impact of COVID-19) and an expected improvement in earnings in 2021.
The estimated year-over-year revenue growth rate for CY 2021 is 7.9%, which is above the 10-year average annual revenue growth rate of 4.5%.
All 11 sectors are projected to report year-over-year growth in earnings, led by energy, industrials, and consumer discretionary.
Higher expected oil prices should boost the top and bottom lines of the energy sector. The consensus analyst projection for the average price of oil in CY 2021 is $45.75 per barrel, which would be 17% higher than the average price of oil in CY 2020 ($39.02/bbl) to date.
If you're not an energy investor, you should still care about the fate of the energy sector, because it's intertwined with the fate of the broader financial markets. Wall Street views energy demand as an economic barometer. The expected stabilization of energy prices next year is generally good news for all investors.
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John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to John's video channel, follow this link.
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