The Biden Bull Market: Alive and Kicking
The Biden era is off to a roaring start on Wall Street. Since the November 3 election, the benchmark SPDR S&P 500 ETF Trust (SPY) has risen 15.6%. Year to date, the SPY is up 18.3%. Over the past month, the SPY is up 3.7%.
If you want to make money in the stock market, forget political party labels. Just do the math. And right now, the numbers point to a bull market that’s still got further to run. If Biden is a “socialist,” as some of his detractors claim, he’s shaping up to be an incompetent one.
Stocks rallied for the second consecutive day on Tuesday, with the Dow Jones Industrial Average jumping 475.57 points (+1.57%), the S&P 500 up 52.45 points (+1.39%), and the tech-heavy NASDAQ Composite rising 209.38 points (+1.56%). In pre-market futures trading Wednesday morning, all three main U.S. stock market indices were in the green.
The corporate earnings picture supports the bull case. After the closing bell Tuesday, strong earnings results from tech titans Amazon (NSDQ: AMZN) and Alphabet (NSDQ: GOOGL) cheered investors.
Stocks have gotten a bit pricey, but valuations aren’t seriously out of whack. For CY 2021, analysts are projecting overall earnings growth of 22.1%. The 12-month forward price-to-earnings (P/E) ratio of the S&P 500 currently hovers at 25.3.
The post-election stock market rally seems sustainable over the long term. Risks still remain, notably the coronavirus pandemic. But if you get too defensive, you’ll be leaving money on the table. Stimulus (both fiscal and monetary) and vaccines are ample reasons for bullishness.
Analysts are increasingly optimistic about first quarter earnings. During the month of January, analysts raised earnings estimates for companies in the S&P 500 for the first quarter. The Q1 bottom-up earnings per share (EPS) estimate rose by 3.2% (to $38.82 from $37.60) during this period. Those numbers come from research firm FactSet, the data provider for Investing Daily.
“Bottom up” is an aggregation of the median EPS estimates for Q1 for all the companies in the index. Let’s put that 3.2% increase into historical context (see chart).
In a typical quarter, analysts reduce earnings estimates during the first month of the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been -2.2%.
Q1 2021 represented the second-highest increase in the bottom-up EPS estimate during the first month of a quarter since Q2 2010, trailing only Q1 2018 (+4.9%). Q4 also marked the third straight quarter in which the bottom-up EPS estimate increased over the first month of a quarter.
The current trend toward upward earnings estimates is further evidence that corporate bottom lines are on the mend, justifying the powerful stock market rally we’ve enjoyed since the presidential election.
As of this writing on Wednesday, more S&P 500 companies are beating EPS estimates for the fourth quarter than average, and beating EPS estimates by a wider margin than average. So far, the S&P 500 is reporting a year-over-year decline in earnings in Q4 of -2.3%. That’s far better than initial estimates and relatively healthy considering the economic damage wrought by the pandemic.
Energy leads the way…
Seven sectors have posted an increase in their bottom-up EPS estimate for Q1 during the first month of the quarter, led by energy (+59%), financials (+10%), and information technology (+6%).
Positive news about COVID-19 vaccines, a recovering economy, and disciplined compliance by OPEC+ with production cuts are feeding bullish sentiment in the energy sector. This confluence of trends also is lifting the broader stock market, which often moves in tandem with the fortunes of the energy patch.
Signs that the economy will take off later this year have prompted investors to rotate into cyclical sectors. Energy stocks have been a major beneficiary of this dynamic over the past few weeks. This rotation into economically sensitive, cyclical “value plays” should continue in the coming months.
It’s also good news that inflation is expected to pick up later this year. We’re conditioned to see inflation as only bad, but moderate inflation is actually beneficial when the economy is struggling to get out of a slump. A greater number of dollars creates more spending, which in turn creates more aggregate demand. Production rises to meet that demand, lifting corporate operating results.
The prospect of higher inflation in 2021 is one reason why gold investments make sense now, especially gold mining stocks.
The professed goal of the Federal Reserve this year is to stoke a measured amount of inflation through monetary stimulus. The Fed predicts that core inflation, which excludes the costs of food and energy, will hover at 2.3% in 2021, up from 1.6% at the end of 2020.
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