If all that damage to the global economy, to supply chains, all those people out of work, all the victims of the coronavirus... if after all that 2020 had to offer, the stock market’s earnings fell only 16% – well, that’s actually not so bad, right? Of course, earnings forecasts can be off... by a lot. Big companies are complicated beasts, and guessing next year’s earnings – even if you’re the CEO of a company, to say nothing of if you’re an outside analyst who’s juggling a few dozen companies in which he has no real insight – is like predicting next week’s weather by sticking your arm out of the window today. But it’s a start... and right now, earnings for the S&P 500 are forecast to rise 24% in 2021. That will take them above where they were in 2019. That’s a pretty good reason for markets to rise. There’s a lot of money to be made out there chasing stocks. Ultimately, shares are like anything else (milk, yoga classes, or an autographed David Bowie vinyl) – their price moves up when there’s more demand (buyers) than supply (sellers). All the things stock market signals that the economy will soon be slowing. And a rising stock market suggests that the economy will be accelerating (which is what we’re seeing now). And earnings forecasts are an important ingredient of how markets look forward – because they suggest whether those all-important earnings streams are getting bigger or smaller.
why stocks are going up that are perfectly valid – but still miss the mark... Earnings weren’t so bad last year. In a normal investment world, company earnings are an important driver of share prices. As a shareholder of a company – which is what you are when you buy a stock – you’re in essence “buying” a stream of future earnings of the company (including, sometimes, dividends). That stream is worth more if earnings are rising... and less if they’re falling. And according to Yardeni Research, the earnings of companies in the S&P 500 declined by 16% in 2020. That’s a stiff drop from forecasts in February 2020, when Goldman Sachs issued a downbeat forecast of 0% growth (compared with a consensus of 7% earnings growth). And it’s also a decline from 2019, when overall earnings were up 0.6%. But if all that damage to the global economy, to supply chains, all those people out of work, all the victims of the coronavirus... if after all that 2020 had to offer, the stock market’s earnings fell only 16% – well, that’s actually not so bad, right? Markets are about earnings – and also about expectations. And maybe 16% isn’t so awful considering, well, everything. But that doesn’t answer the question – why didn’t earnings of listed companies fall more, if the economy has been so lousy? Markets are forward looking. Stock markets are a leading economic indicator – that is, they telegraph the direction of the economy in advance. A downwardly trending
American Consequences
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