Equity market: EPS to grow even more than expected in 2021

As we know, Q4 is the best quarter of the year for the US stockmarkets (since 1945) and November-December are the two best months. We do not pay much attention to these statistical facts (see especially 1929, 1987, 2008 and 2018) and we prefer to look at the most tangible potential drivers.

The S&P 500 has gained 10% in November 2020. But this rebound is justified because the prospect of a vaccine is a very powerful market driver.

In fact, the markets already factor in the expected macro- and microeconomic rebound that will arise from the vaccine. But is there potential for positive surprises here over the coming months? We believe so.

Bear in mind that, in periods of macroeconomic recovery, even moderate ones, earnings can recover very strongly. In 2003, EPS jumped 14% in the eurozone after inching up 3% 20022 . In the US, they surged 16% after plunging 19% in 2002. And again in 2009-2010, EPS first plummeted 18% then jumped 41% in Europe and fell 38% before rocketing 40% in the US . This illustrates the operating leverage of EPS on economic growth.

Back in late 2009, despite positive forecasts, analysts underestimated the scope of the EPS recovery. For instance in mid-November 2009, US analysts projected EPS growth of just 22% whereas EPS effectively grew 40% as we stated above. In so far as we estimate that the macroeconomic consensus does not adequately factor in the positive impact of the vaccine on the recovery (which should materialise from Q2 2001,), we also believe EPS growth in the two major regions should exceed current expectations.

The markets may well experience further consolidation in the next few days and weeks due to the high appetite for risk, the surge in the pandemic in the in the Northern hemisphere, negative macroeconomic momentum in the US (and some other countries) and relatively aggressive investor positioning. Furthermore, current EPS revision momentum is unfavourable due to the ongoing economic downturn in Q4.

We nevertheless remain bullish equities and risk assets with a six-month view. We believe the main determinant of risk asset markets in H1 2021 will be EPS forecast upgrades, fuelled by more positive economic forecasts, resolutely accommodative monetary policies and a still favourable risk premium. The (moderate) upturn in bond yields will be ascribable to reflation stemming from the economic recovery rather than from a monetary policy shock.