Investment Idea

Optimistic forecasts like this at the beginning of a new year

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18/01/2021 | 6 min read
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Eurythmics did not sing about the reporting season but about the rain. But for the stock market it is about the same. Every three months there is a reporting season. It always provides an opportunity for the market to reflect. The stock market is governed by expectations. It is when the reports come in that reality shows its hard cold face. Is the market too high or low?

“Here comes the earnings season again – falling over my head like a new emotion”


Eurythmics did not sing about the reporting season but about the rain. But for the stock market it is about the same. Every three months there is a reporting season. It always provides an opportunity for the market to reflect. The stock market is governed by expectations. It is when the reports come in that reality shows its hard cold face. Is the market too high or low? This is reflected in the consensus expectations among analysts. Nowadays, with computer trading in full swing, it can be assumed that the initial reaction in the stock market is that the price moves about as many percent up or down as the result deviates from expectations.

But analysts do not live in their own aquarium. They are affected by the market, macro and above all what seeps out of the companies. Especially in the US, companies are very good at controlling consensus expectations. In addition, repurchase and other methods are frequently used to massage the share prices because it is usually the parameter that is most important to show the company’s success.


The graph above shows how analysts put their earnings per share estimates in the blue lines. Note how they always start high when they show the forecast for the coming year. But as time catches up and result and prospects fall, forecasts are pushed down. This does not mean that share prices also need to keep up. But it is a headwind that partly explains the seasonal variations on the stock market. Nothing is easier than to start looking at and trading on next year’s profits during the fourth quarter. It is also relatively easy to make optimistic forecasts at the beginning of the year when there are twelve months left to conclude.

Analysts’ forecasts are generally 30 percent above the outcome, according to an analysis by Ed Yardeni.


Above is the development (open compared to close) for the S&P500 index over the past five years monthly. January usually starts well and is really the continuation and end of the positive season that begins in October. After that, there is usually a decline in March-April (although April has been strong for the past five years).

At the end of the summer, reality begins to catch up with analysts. September and October are usually both difficult months but also lay the foundation for the usually strong end of the year.


According to theory, the stock market should not be able to gain higher growth than GDP, which is about 2-4 percent per year. Growth in corporate earnings per share is around 6-7 percent. This is not in line with the stock market development above, which is based on steroids and which is becoming increasingly parabolic, just as it was during the late 1990s.

An important lesson from the past, from us who have been through a few crashes: It is never possible to predict a crash. Although the signs are becoming clearer that the market is overvalued, the only lesson is that overvalued markets can be overvalued for several years before they finally implode.

We wrote in the last weekly letter that the happy 1920s may be on the way back. The thesis is since states and central banks currently have the initiative to flow the markets with financial support. It can take years before these grants are withdrawn. It is only when the confidence in the states and the central banks weakens or that financial support is de facto withdrawn, that it become serious for the markets.

When investing in the stock market, you must be aware that the fall height can be significant. Long only is not a good strategy if you do not constantly keep updated exit plans.

The Q4 2020 reporting season in the US so far
As of January 15, 26 of 504 companies in the S&P500 index have reported their Q4 results (or equivalent). It is only 5 percent of the population and far too few to draw any definite conclusions. But the outcome is very good so far with 96 percent better than expected on profit and 81 percent on revenue. On Friday, three bank reports came out (JP Morgan, Citigroup, and Wells Fargo), all of which were better than expected. But on Friday the S&P500 index still fell by 0.7 percent, so good company reports right now do not seem to be enough stand alone.

Source: Reuters/Carlsquare

Of the 26 US companies, approximately half reported in December 2020 (i.e., Sep-Nov or Aug-Oct) and the other half in January 2021 (then classic Q4 figures for Oct-Dec 2020).

Below we have listed the 26 companies that reported on average profit surprise, where the weighted average amounts to 20 percent and the forecast change for the next quarter is minus 0.5 percent. The latter indicator (forward guidance) is perhaps the most important and maybe an explanation why the report outcome has not had such a large positive price effect. But apart from airlines, retailers and restaurants, the forward guidance looks better. It is also well known that shutdowns due to corona have continued during December and January in many countries, something that affects these three business sectors very negatively.


If we look at the earnings trend, the earnings outcome during the third quarter of 2020 was significantly better than the analysts’ forecasts. So far, the earnings outcome for Q4 2020 has improved from a forecast of minus 9.2 percent to minus 6.8 percent as of January 15, 2021. If the S&P500-companies were able to exceed the analysts’ profit expectations by 10 percent, this would mean that the profit decline in Q4 2020 would improve further from minus 6.8 percent to minus 5.2 percent.

If we study the graph below, Q2 2020 was hopefully the bottom in terms of earnings development, following the Corona eruption. The important thing now is that the positive trend continues so that Q1 2021 will be the first quarter when the S&P500-companies can once again show a positive change in earnings.

Source: Factset.

The skeptical may point out that employment in the United States recovered very sharply soon after the fall in the spring of 2020. Since then, the pace of improvement has gradually slowed. The relationship between the S&P500 index, corporate profits and employment in the US has historically been quite good.


The S&P 500 index is trading in a narrow rising trend. Note how the index bounced nicely intraday of MA20 on Friday. Nevertheless, momentum is again losing pace, which can be seen in MACD as well as a downwards sloping EMA9. In case of a break to the downside, the next level can be found around 3 670, where Fibonacci 23.6 meet up:


There has once again been a movement in favor of value stocks because of investors being optimistic about the various initiatives proposed by incoming president Biden to support a quick comeback of the US economy. But the tech heavy Nasdaq index has managed well and is as the broader S&P 500 trading in a narrow upwards sloping trend. However, even for Nasdaq MACD indicates a weakened momentum. In case of a break of the upwards sloping trend, the next level on the downside can be found around 12 535, where Fibonacci 23.6 meet up:


The Tesla share is from a fundamental point of view difficult to value and let’s not even talk about the multiples. Tesla is indeed a pioneer, but competition is heating up. Can Tesla start to deliver numbers that justify its valuation? Well, again momentum is starting to fade which can be seen from the falling MACD histogram. A break below EMA9 and MA 20 around the 739 USD-level comes into play. Next after that is the 650 USD-level:


We have for some time been talking about a bounce in the USD after the currency has lost in value against the basket. This bounce has now materialized to some extent and may work against the stock market. Below is the EUR/USD. Note how the currency pair is trading at a support in form of MA50 and Fibonacci 38.2. Is this the end of a strengthening USD for now? Or will we see further downside in the EUR/USD?


From a technical point of view, the next level on the downside for the currency pair is Fibonacci 50, around 1,98.

Even though the USD has gotten stronger, copper remain trading upwards supported by a rising MA20. Note the negative divergence with MACD. A break below the rising trendline and a continued strength of the USD can very well be the recipe for MA 50 and Fibonacci 50 to come into play:


A falling copper price may open for further downside in the Boliden share that closed Friday’s trading at MA20. In a scenario of a falling copper prices put Fibonacci 50, around the 280 SEK-level, into play in Boliden?


A move towards value stocks has been good for the OMXS30 index that has been doing relatively good so far this year. As shown in the graph below, the index is trading above EMA9. In case that OMXS30 catch the falling momentum from the US, the 1 930-level may be next:


The German DAX index was under pressure last Friday but managed to bounce back up to close above MA20…but down 1,4%. In case of further weakness, 13 500 is the next level on the downside:



This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.


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