Strategists bump up U.S. profit targets after fourth quarter blows past expectations

  • By Caroline Valetkevitch,
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Bank strategists are raising their estimates for U.S. corporate profitability this year following surprisingly strong fourth-quarter earnings and growing optimism about an economic rebound.

The sharp earnings growth will bolster the case for equity gains this year, they said.

Based on results from nearly all of the S&P 500 (.SPX) companies as of Friday, earnings rose 4.1% in the fourth quarter of 2020 from the year-ago period, defying analysts’ expectations for a 10.3% decline, according to IBES data from Refinitiv.

Credit Suisse Securities’ chief U.S. equity strategist, Jonathan Golub, recently hiked his 2021 earnings per share target to $185 from $175 following upbeat fourth-quarter results, citing an expected sharp acceleration in the economy.

If earnings are rising faster than prices, price-to-earnings multiples could contract modestly, he said.

“I’m predicting stocks are meaningfully cheaper between now and the end of the year, which is a very nice setup not only for this year but for next year,” Golub said.

Some investors have been concerned that the benchmark S&P 500 is up more than 70% from its March 2020 bottom, with much of the gains being driven by investor optimism over the expected rebound in earnings and the economy.

The S&P 500 is trading close to 22 times earnings estimates for the next 12 months, according to Refinitiv. That price-to-earnings multiple (P/E) is well above the 15 long-term average.

Concerns about valuations were partly behind a recent sell-off that left the Nasdaq on Monday more than 10% below its Feb. 12 record close, confirming a correction in the index. Technology and other areas of the market that had outperformed due to the coronavirus pandemic led the recent declines.

Outlook for tech

David Bianco, Americas chief investment officer for DWS, said while valuations are a concern for the overall market, he’s “not panicked about the outlook for tech.

“To think that technology is not going to benefit from a stronger economy and a reopening of businesses is actually ignoring the history we’ve had the last few years,” he said.

DWS has hiked its 2021 and 2022 EPS forecasts.

Wall Street’s “bottom up” consensus EPS forecast for 2021, based on estimates from analysts who cover individual companies, has also increased since the start of the year. It was at $174 as of Friday, up from $167 on Dec. 31, based on Refinitiv’s data.

S&P 500 company earnings are expected to rise by 23.9% in 2021 after falling 12% in 2020, based on Refinitiv data as of Friday.

Goldman Sachs has raised its S&P 500 2021 EPS forecast to $181 from $178 after the fourth-quarter reports.

The new forecast, its strategists wrote, reflects “higher sales and profit margins that should overcome input cost pressures due to high operating leverage.”

S&P 500 companies begin reporting on the first quarter in mid-April, with year-over-year earnings expected to grow 22% in the quarter, based on Refinitiv’s data.

“First quarter’s probably going to be better than people thought it was a month ago,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

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