by Peter Jones, CFA
Senior Vice President
As long-term investors, we were pleased to see market news pivot away from last week’s GameStop mania and shift back to a focus on fundamentals. Although we prefer rational markets, we take no pleasure in the knowledge that many retail investors who purchased GameStop at more than $300 per share have seen the share price tumble to around $60. Broader markets, however, brushed off the precipitous decline in the hype stocks and enjoyed an outstanding week of gains, with the S&P 500 climbing 5 percent and reaching new all-time highs.
The first week of February marks the heart of earnings season, where companies provide details on their fourth quarter and full year 2020 results. Even more importantly, companies “guide” investors on their expectations for 2021 revenues and profits. Many have had the jitters about earnings season because Wall Street forecasters entered the year predicting a 22 percent earnings growth for 2021. This is a high bar to clear given still elevated COVID-19 cases and nascent vaccine distribution. Despite these high expectations, companies have by and large provided strong fourth quarter results and optimistic commentary about 2021. In fact, strong earnings results have led to an uptick in expectations for 2021, with consensus now looking for 24 percent earnings growth to $171 as can be seen in the chart below.
Source: FactSet
Along with strong earnings results, labor markets continue to improve. Referencing data released today by the U.S. Bureau of Labor Statistics, private employers added 47,000 new jobs in the month of January and, although this number was short of expectations, the trend is moving in the right direction. In fact, the unemployment rate declined to 6.3 percent, less than half of what it was 10 months ago. While vaccine distribution is still early days, distribution speed has been encouraging. More than one million doses are being administered daily and the cumulative doses now cover more than 10 percent of the U.S. population. As can be seen in the chart below, the U.S. trails only the UK in vaccinations per capita, and leads the developed world in total number of vaccinations.
Source: Our World in Data
The next catalyst for markets will likely come from the form and magnitude of fiscal stimulus. The Biden administration is targeting a staggering $1.9 trillion in stimulus. While the overall price tag is likely to come down as it works its way through Congress, $1,400 direct payments still look to be a key facet of the stimulus package. To be clear, the market already expects substantial stimulus so when the package does get signed into law, the market’s reaction will depend on whether the form and magnitude is above or below what is priced into markets.
Our Takeaways from the Week
The news cycle is beginning to pivot away from mania stocks like GameStop, returning to a focus on the fundamentals
Fourth quarter corporate earnings and 2021 guidance have been impressive, and earnings growth this year is expected to be an outstanding 24 percent
Labor market momentum slowed this month, but the trend continues to be positive
Vaccine distribution is still in its early days, but progress is encouraging