· DOW JONES, NASDAQ 100, S&P 500 FUNDAMENTAL FORECAST: BULLISH
The Q4 earnings season is around the corner, with about 9% of the S&P 500 companies reporting their results in the week of 18-22 January. Peak earnings season arrives in the last two weeks of January 2021, with 25% and 22% of the S&P 500 components releasing results respectively (table below). By then, major American banks and the five FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) would have delivered their scores, which are critical to the performance of the S&P 500, Dow Jones and Nasdaq 100 indices. Investors will focus on fundamental metrics and assess how Corporate America fared in the winter when another severe viral wave hit the economy.
Analysts and companies were increasingly optimistic about Q4 earnings, with the estimated EPS decline for the quarter revised up to -8.8% from -12.7% seen in the end of September, according to data compiled by FactSet. Only 29 S&P 500 companies have issued negative EPS guidance, compared to 56 that gave a positive assessment. Among companies with negative Q4 EPS estimations, the majority are in the aviation, entertainment, tourism, hospitality and energy sectors that were hit the hardest by Covid-related restrictions.
Sector-wise, the largest upward earnings revisions were observed in the financials sector (from -24.1% to -7.5%), led by big banks such as JP Morgan, Bank of America, Citigroup and Goldman Sachs. The outlook for the materials (from -2.0% to 7.1%) and communicationservices (from -18.2% to -12.9%) sectors have also improved significantly, led by Mosaic, Nucor, Alphabet, Facebook, and Netflix. The energy sector is likely to remain weak, with the expected earnings decline widening from -83.0% to -98.4%. Exxon Mobil, Phillips 66 and Chevron are the key companies to focus on in this sector.
Recently,investors became increasingly wary about stock markets’ rich valuation against the backdrop of a worsening pandemic. The S&P 500 index is trading at a price-to-earnings (P/E) ratioabove30.0, at the highest level in two decades and nearly 50% above the five-year average of 20.5. Such valuation may render the index vulnerable to profit-taking should earnings unexpectedly disappoint.
Despite near-term headwinds, a fresh US$ 1.9 trillion Covid-relief plan proposed by President-elect Joe Biden appeared to have revitalized hopes for reflation thanks to a bolder stimulus offset to the virus crisis. The gradual rollout of Covid-19 vaccines around the world may foster a faster pace of recovery and normalization in business activity in the medium term. In the meanwhile, base metal and crude oil prices have surged to multi-month highs, reflecting an improving demand outlook as a recovery appears to get underway.
The cycle-linked energy, materials, financials and industrials sectors have been outperforming since the end of last year, extending a rotation into value from big tech names. The reflation trade may encourage a catch-up rally in the Dow Jones and S&P 500 indices, both of which have largely underperformed relative to the Nasdaq 100 during 2020 as the pandemic hit traditional industries harder.
· Asia shares pare losses as China economy rebounds
Asian shares pared early losses on Monday as data confirmed China’s economy had bounced back last quarter as factory output jumped, helping partially offset recent disappointing news on U.S. consumer spending.
Chinese blue chips gained 0.8% after the economy was reported to have grown 6.5% in the fourth quarter, on a year earlier, topping forecasts of 6.1%.
Industrial production for December also beat estimates, though retail sales missed the mark.
MSCI’s broadest index of Asia-Pacific shares outside Japan trimmed losses and were off 0.3%, having hit a string of record peaks in recent weeks. Japan’s Nikkei slipped 0.8% and away from a 30-year high.
E-Mini futures for the S&P 500 dipped 0.2%, though Wall Street will be closed on Monday for a holiday. EUROSTOXX 50 futures eased 0.2% and FTSE futures 0.1%.
· Nikkei slips on profit-taking after recent rally; semi-conductors weigh
Japanese stock prices slid on Monday as investors took profits from recent gainers, including semiconductor-related shares, following the market’s rapid ascent to a three-decade high earlier this month.
The Nikkei average dropped 0.97% to end at 28,242.21, slipping further from its 30-year peak of 28,979 touched last week. It is still up 2.90% so far this month.
The broader Topix lost 0.60% to 1,845.49.
Investors booked profits on shares that rallied on hopes of big stimulus spending by the incoming Biden Administration in the United States.
· Samsung shares plunge after vice-chairman gets jail term for bribery
Shares of firms related to South Korean conglomerate Samsung Group plunged in Monday trade after Reuters reported that Samsung heir Jay Y. Lee has received a 2-1/2-year jail term.
Industry heavyweight Samsung Electronics plunged more than 4% in Monday trade before clawing back from some of those losses, last trading 3.75% lower. Samsung C&T dived more than 7.49% while Samsung Heavy Industries declined 3.31%. The Seoul High Court found Lee guilty of bribery, embezzlement and concealment of criminal proceeds, according to Reuters.
The broader Kospi index in South Korea led losses among the region’s major markets as it dropped 2.54%.
· China stocks end higher on upbeat GDP data
China stocks ended higher on Monday, as investors cheered better-than-expected gross domestic product (GDP) data pointing to a strong recovery from the coronavirus crisis in the world's second-largest economy.
The blue-chip CSI300 index rose 1.1% to close at 5,518.52, while the Shanghai Composite Index gained 0.8% to 3,596.22.
· European stocks fractionally lower amid general market caution; FCA and PSA merger confirmed
European stocks started the new trading week slightly lower on Monday, amid a pullback in global markets.
The pan-European Stoxx 600 slipped 0.2% below the flatline in early trade, oil and gas stocks shedding 1% to lead losses while the tech sector climbed 0.5%.
European investors will also be looking at Germany on Monday following the election on Saturday of Armin Laschet as the new chairman of the ruling CDU party. The move paves the way for him to possibly replace Angela Merkel as chancellor at elections later this year.
In corporate news, the merger between Fiat Chrysler-owner FCA and Peugeot-owner PSA Group was finalized over the weekend, creating the world’s fourth-largest car manufacturer by volume. The new company, named Stellantis, will be headed up by former PSA CEO Carlos Tavares.
Reference: CNBC, Reuters
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