Investors look to upcoming US earnings for a view of the year

Investors will be anxious to see whether upcoming quarterly reports and outlooks from US companies validate expectations for a strong 2021 rebound in earnings and the economy, which were ravaged by the coronavirus pandemic last year.

US stocks are at record highs, boosted largely by optimism that the rollout of vaccines to fight the COVID-19 virus will allow for that recovery, while hopes of more fiscal stimulus under US President-elect Joe Biden have also underpinned the market.

Earnings reports for the last quarter of 2020 kick off this week, with the release of results from JP Morgan, Citi and other big banks.

Earnings for S&P 500 companies are expected to have dropped 9.8% in the fourth quarter from a year ago, according to IBES data from Refinitiv.

But earnings are expected to rebound this year, with a gain of 16.4% projected for the first quarter. That forecast has improved since the fall, while S&P 500 earnings are expected to grow 23.6% in 2021, benefiting from easy comparisons with 2020.

Investors may be even more keen to find out what company executives say about 2021 than they are to see fourth-quarter results, which come as virus cases are surging across the United States and Europe.

“Managements and analysts are really going to be focused not necessarily on the rear mirror. They’re really thinking about 2021,” said Kenneth Leon, research director at CFRA Research.

What’s also going to be key is “the pulse of each sector and how it affects investors in terms of thinking whether there’s an attractive value there or whether they might need to take a breather,” Leon said.

The S&P 500 is trading at 22.7 times forward earnings, well above the long-term average of about 15, based on Refinitiv’s data.

“Stocks already reflect a pretty positive outlook for earnings,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

Earnings for energy and industrials sectors are expected to have declined the most of all sectors in the fourth quarter.

While economically sensitive sectors such as those have been outperforming the broader market in recent months, they still lagged technology for 2020, and their valuations in general are seen by some as less pricey than other sectors.

A large portion of cyclical names fall under the “value” label, and investors have watched the Russell 1000 value index close the gap on the Russell 1000 growth index following upbeat vaccine news.

With virus cases still rising, many strategists expect the bigger recovery to take place in the second half of the year.

“Most likely, second-half outlooks will move higher as corporations gain clarity and ultimately confidence,” Lindsey Bell, chief investment strategist for Ally Invest, wrote in a report Friday.

Yet the uncertainty surrounding the recovery makes getting information from companies even more critical at this stage, even if it’s not “formal” guidance, said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

“That’s important for a market anxious to turn the corner,” after a tough year, she said.

Major HSBC shareholders are calling on Europe’s biggest bank to toughen its commitment to cut lending linked to fossil fuels and to turn its climate “ambitions” into targets.

Investors collectively managing some $2.4 trillion in assets have filed the resolution to be voted on at HSBC’s annual general meeting, after HSBC in October stated its ambition to get to net zero carbon emissions by 2050.

That pledge was criticised by campaigners for not directly addressing HSBC’s lending to fossil fuel firms, including a relatively large share of clients involved in the coal sector.

“HSBC is strongly committed to addressing climate change, in line with our clear ambition to align our financed emissions of our entire business portfolio to net zero by 2050 or sooner,” a spokesperson for the bank said.

But after a four-year period of engagement with HSBC, the investors coordinated by responsible investment group ShareAction and including Europe’s largest asset manager Amundi said they wanted to see the bank go further.

“As Europe’s largest bank and the second largest provider of fossil fuel financing, HSBC has the unique opportunity to help lead the financial services sector towards Paris-aligned commitments rather than mere ambitions,” said Jason Mitchell, Co-Head of Responsible Investment at Man Group.

The investors want HSBC to set short and medium-term targets that are in line with the goals of the Paris climate agreement, which aims to limit global warming to 1.5 degrees Celsius above pre-industrial norms by mid-century.

Among those supporting the resolution are British hedge fund Man Group, Swedish insurance company Folksam and British pension scheme investor Brunel Pension Partnership, alongside 117 individual shareholders.

The spokesperson said HSBC will continue to engage with shareholders and ShareAction over the detail of its plans.

The HSBC resolution, the second such action taken against a major British lender, will need to receive backing from 75% of the votes cast at its meeting in April to pass.