Who says equity markets are “dislocated from reality”, asks a Morgan Stanley note. America’s S&P 500 has rallied by more than 50% since the March lows and closed just short of an all-time high on Monday. In a year marked by a devastating pandemic the index is up by more than 3%. Yet earnings have been surprisingly chipper, suggesting that everything is not quite as grim as predicted.
Clearing a very low bar
As of early this week about 90% of S&P 500 companies had reported profits for the second-quarter, a period that coincided with the worst of the global lockdowns. Unsurprisingly, aggregate earnings are down by 33% year-on-year, says Morgan Stanley. That was driven by steep losses at energy, travel and finance companies, but the median loss was a slightly more modest 14.6%. Results have beaten analysts’ forecasts by an average of more than 20%, much higher than the usual “beat” of 5%. Markets are forward-looking, and stocks are saying that 2021 will be a better year.
This earnings season has been all about expectations management, David Kostin of Goldman Sachs told The Economist. Wall Street analysts often “low-ball” earnings estimates so that they can celebrate a contrived “surprise” on results day. Take Disney, says The Economist. It lost $4.7bn thanks to closed cinemas and theme parks. Markets, fearing an even worse performance, were delighted and the shares rose.
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It is easy enough to decry this bull market, says Jim O’Neill in Project Syndicate. Some combination of failed vaccine trials and a devastating second wave would certainly puncture the current optimism. Yet if recent reports are to be believed, then “at least four vaccine candidates” might be ready “as soon as the end of this year”. Meanwhile, governments in most places are getting gradually better at testing and contact tracing.
America chooses
The other great market obsession over the coming months will be the US presidential election, says John Authers on Bloomberg. Polling currently gives Joe Biden a six-point lead, but this remains a close race. What does that mean for stocks? As Bankim Chadha of Deutsche Bank points out, the S&P 500 typically trades in a tight range during narrow election years, only to rally once the victor is known in November.
Investors are uncertain about which of the two candidates is the most market-friendly, writes Lisa Beilfuss in Barron’s. Joe Biden is promising to reverse corporate tax cuts and could bring in more business regulation. Yet tax changes often have less impact on earnings than feared and investors would also be glad to see the back of Donald Trump’s destabilising trade wars. If Joe Biden wins the presidency but the Republicans keep the Senate – enabling them to scupper Democratic tax plans – then Wall Street is likely to cheer.
In any case, market commentators tend to exaggerate the importance of presidential races. History shows that underlying economic conditions are a far more important factor driving returns than which party holds the White House.
Where to look for income now
Are negative interest rates coming to Britain? The Bank of England’s August Monetary Policy Report says that policymakers are “currently considering…whether a negative policy rate could provide economic stimulus”.
Interest rates are already at 0.1%, a historic low, but as Panicos Demetriades says on theconversation.com, they may well go lower yet. The Bank of England governor, Andrew Bailey, last week said there were no immediate plans to resort to negative rates, but “they are part of our toolbox”.
Talk of a world where “savers find cash disappearing from their accounts” is disconcerting, writes Tim Wallace for The Daily Telegraph. Not least because the evidence from other countries shows that the policy delivers “very mixed results”.
Negative rates have not rescued Japan from its long stagnation. Yet through “want of other ideas” further interest rate cuts remain very much on the table.
The prospect of ever lower interest rates might be easier for savers to stomach if they could bank on regular dividend income. Yet BP last week became the latest FTSE 100 firm to slash its dividend. The Covid-19 dividend axe has hit British investors particularly hard. The Financial Times reports that underlying global dividends will fall by up to 25% this year, but in the UK that figure could reach 42%, according to data from the Janus Henderson Global Dividend Index.
What are savers to do? The solution is to “go global”, writes Toby Walne in The Mail on Sunday. The payout cuts mean that the British market is losing its historic income edge. Ben Yearsley of Fairview Investing suggests that income seekers look instead to emerging Asia and Japan for more diversified and resilient payouts.
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