Equity markets have rebounded quickly from their March lows on the back of the unprecedented fiscal and monetary policy response.
2Q20 should mark a low point for earnings; technology and healthcare are holding up relatively well compared to the more cyclical parts of the equity market.
Corporate guidance should gradually return, which could help investors set realistic expectations for 2H20 and 2021.
Higher taxes are more a question of when than if; an increase in corporate taxes next year would weigh on the expected rebound in profits.
We are inclined to embrace more cyclicality in portfolios, but remain balanced in our views on growth vs. value.
The equity market’s round trip
The second quarter saw one of the fastest stock market rebounds in history. In response, many investors are voicing concerns that markets have decoupled from the economy and valuations are now too high. Both of these things are true, but in the post-GFC era, we have often seen that the policy response matters more than the fundamentals in the short-run. Yes, in the long-run earnings will need to catch-up or prices will need to move lower, but in the interim, an aggressive and coordinated policy response has supported risk assets.
As a result, investors have chosen to look through 2020 and focus on the potential for a rebound in economic activity and corporate profits in 2021 (Exhibit 1). This is not wrong, as the virus and recession will both prove to be transitory, but there are many questions about the pace and shape of the economic recovery. With that in mind, investors will increasingly focus their attention on corporate guidance during the coming quarters – no matter how small or seemingly insignificant – to try and determine the trajectory of earnings in the back half of 2020 and into 2021.
Exhibit 1: S&P 500 earnings per share (EPS)
Index annual operating earnings
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