It’s Okay To Be Bullish Again (No, Really)
Before the November 3 presidential election, the pandemic-era stock market rally since the lows of late March hadn’t been getting a lot of love. Analysts (including myself) warned that the surge in stocks seemed disconnected from several stark realities: the recession, negative corporate earnings growth, political uncertainty, rising trade tensions, and COVID-19.
However, since November 3, much of the underlying worry on Wall Street has dissipated. Projections for economic growth in 2021 are getting revised upward, earnings have come in better-than-feared, the election is over, President-elect Joe Biden is a free trader, and at least two highly promising coronavirus vaccines are in the pipeline. We seem to be positioned for a secular bull run in 2021.
Wall Street has decided that it’s okay to be bullish again and I concur. Next year’s prospects warrant optimism.
The coronavirus remains a deadly threat, of course, but investors expect that vaccines combined with new public health policies next year will mitigate the suffering and economic damage. U.S. stocks hit new record highs Monday.
On Tuesday, the three main indices took a breather. The Dow Jones Industrial Average fell 167.09 points (-0.56%), the S&P 500 slipped 17.38 points (-0.48%), and the tech-intensive NASDAQ shed 24.79 points (-0.21%). Small caps continued to outperform, a sign that investors expect economic growth to pick up speed.
In pre-market futures trading Wednesday morning, U.S. stocks indicated an opening gain of about 100 points for the Dow. Futures for the S&P 500 and NASDAQ also edged higher. Pfizer (NYSE: PFE) cheered investors on Wednesday by reporting that its vaccine is 95% effective.
Now’s not the time for investors to get into a defensive crouch. As the fraught year draws to a close, we face an economic rebirth in 2021. Global stock market benchmarks also have been rising in recent weeks, as overseas economies start to gain traction. In particular, Asia has largely bounced back from the pandemic and is poised to lead the recovery.
The International Monetary Fund projects that global gross domestic product (GDP) growth in full year 2021 will reach 5.4% on a year-over-year basis. Experts on average have raised their projections for global GDP growth to about 5% next year, as the following chart shows:
Goldman Sachs (NYSE: GS) is even more confident about economic growth. The investment banking giant recently released a research note to clients that calls for global GDP growth to hit 6% in 2021. The research note calls for China to hit GDP growth of 7.5%, as the country’s post-COVID domestic demand rebounds. Goldman also predicted that global equity markets should post 34% earnings per share (EPS) growth in 2021, after the 20% decline in 2020.
To date for the third quarter, 92% of S&P 500 companies have reported operating results. Among these companies, 84% have reported actual EPS above the mean estimate, 4% have reported actual EPS equal to the mean estimate, and 12% have reported actual EPS below the mean estimate. The percentage of companies reporting EPS above the mean estimate is above the one-year (73%) average and above the five-year (73%) average.
In aggregate, companies are reporting earnings that are 19.4% above expectations. This percentage of positive surprises exceeds the one-year (+8.0%) average and the five-year (+5.6%) average.
Since the market’s pandemic trough, the NASDAQ composite has rebounded to the greatest degree among the major U.S. benchmarks, as Big Tech companies report robust earnings.
These Silicon Valley giants also are positioned to reap the lion’s share of a new economy that’s being born during quarantine, i.e. an accelerated adoption of mobile and virtual technologies. Add to these technologies artificial intelligence, machine learning, robotics, electric and autonomous vehicles, and renewable energy.
Next year will usher in the next phase of the post-industrial society. The investment opportunities are enormous. Emblematic of this shift was the announcement on Monday that electric car maker Tesla (NSDQ: TSLA) would be added to the S&P 500 in December.
At the center of these tech trends is the Internet of Things (IoT), a seamless system whereby everyday objects are integrated into a data-sharing network. Driving IoT will be 5G (“fifth generation”) technology, the latest iteration of wireless capabilities.
5G will facilitate IoT by allowing several interconnected electronic devices and machines to communicate with each other instantaneously at ultra-fast speeds. For the best investment opportunities in 5G, read our latest report.
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