U.S. stocks have started the week on the wrong foot again.
All three major U.S. indexes climbed last week despite the unemployment rate rising to 14.7% — the worst since the Great Depression. The coronavirus pandemic cost 20.5 million U.S. jobs in April, according to Friday’s data. However, stocks were mixed on Monday as investors looked toward the global recovery.
In our call of the day, ING strategists said investors may be attaching too much weight to the 2021 recovery. Investors were prepared to “look through” the 2020 slowdown, with a 20% fall in S&P 500 earnings being priced in to the market before a 25% recovery next year, they said.
The bank’s research team, led by global head of markets Chris Turner, said the consensus 20% decline for U.S. corporate earnings in 2020 was “too optimistic.”
ING’s chief international economist James Knightley sees a 7% contraction in U.S. gross domestic product, well below the -4% consensus, which the team said would see the 2020 drop in corporate profits “dwarf” those of the financial crisis.
“Equally, the poor transparency for corporate profits — where even Amazon AMZN, +1.23% and Apple AAPL, +1.57% are struggling for guidance — suggests investors will need some strong compensation for holding equities,” they said.
They noted that given the recent 35% rally off lows and the expansion in price to earnings ratios, the 12-month forward earnings yield on the S&P 500 offered a less than 400 basis point pickup over the long end of the U.S. Treasury market.
“In uncertain times like these, higher earnings expectations or lower valuations may be needed to keep equity markets supported. We err towards the latter,” they said.
