Just over 50 S&P 500 companies have now published their earnings, and a solid upward trend is emerging. Just like in the previous quarter, the results are coming in well above the consensus forecasts, which don’t seem to have factored in the uptick in economic growth.
With White House and Congress still at a stalemate, the chances of a new fiscal stimulus package getting through before the election on 3 November are fading, which could derail the US economic recovery. If the Democrats win a majority in Congress and Joe Biden becomes president, things could start moving forward – but that wouldn’t be until early next year.
Economic indicators continue to improve in the eurozone, but at a more sluggish pace. Industrial output, for instance, rose 5% month on month in July but only 0.7% in August. It’s still too early to gauge how much the second wave will hurt the recovery. If things get worse again, the ECB could bring in additional measures.
USA – a new cycle has begun!
markets paid little heed to the fears of a second wave of infections and instead focused on the prospects for the economic recovery. The outlook is bright for the end of the year and most of 2021 as well. Although the US economy initially took a nosedive, the subsequent recovery has been just as steep. Forecasts for next year keep creeping up, with economists expecting to see GDP growth of 4, 5 or even 6%. We think the economy might even beat these forecasts, although that will depend mainly on when a COVID-19 vaccine becomes available. While the government’s sweeping rescue plan pushed up household saving considerably and prevented a string of bankruptcies, spending on services continues to be hampered by public-health restrictions. The tourism and leisure industries are still struggling, which means that the uptick in consumer spending is focused on durable goods.
Economists have, for the most part, factored the recent good news into their forecasts, but the same can’t be said for market analysts, who have been hindered by the lack of communication from companies about their financial targets. Even though Q2 earnings came in at around 20% above the consensus, Q3 earnings forecasts are still resolutely cautious. We therefore expect upward revisions of 2020 and 2021 forecasts once the next quarterly earnings have been published. This should help to bring stock-market valuations back down to normal levels.
This buoyant climate is further supported by the Fed’s monetary policy, which has never been so loose and looks set to stay that way until at least 2023, helping to drive valuations up further. Given the extent of the stimulus, we think it would be risky to continue underweighting US equities, which is why we have increased our exposure in recent weeks. Finally, we don’t think the upcoming presidential election represents any real risk for the markets, given that Joe Biden seems to be well in the lead. If the Democrat wins and gets a clear majority in Congress, it will be easier to bring in the fiscal stimulus the US economy now needs to keep the recovery on track.
Eurozone - A much-awaited package worth EUR 750 billion
After a summer filled with extremely positive news, things have now become more complicated in Europe. Economic news has been more mixed recently, and Europe has seen COVID-19 infection rates soar once again. Still, it’s worth pointing out that the manufacturing sector is recovering well, especially in Germany. Retail sales have also bounced back, driven by an uptick in consumer confidence despite the pandemic.
However, there is still a lot of uncertainty in the services sector, particularly in tourism, which could continue to struggle until a vaccine is widely available. But let’s not forget that eurozone governments and the ECB have put in place unprecedented stimulus measures and that the European Commission has a EUR 750 billion rescue plan. These measures should shore up the economies hit hardest by the pandemic, especially those in southern Europe. We think the stimulus package will give the eurozone renewed momentum, improve political coordination and ensure more robust growth. This should eventually lead to a decline in risk premiums on the region’s stock markets, which could then start making up for the ground lost this year. Transitioning to a green economy is the cornerstone of the eurozone rescue package, and we think that companies in Europe are well positioned to reap the benefits of this.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
