Better Than Anticipated Corporate Profits Consolidate Stock Market Revival

U.S. companies have reported far better earnings in the third quarter than initially forecast. This has led to a consolidation of the stock market rally, and could act as the foundation for further gains throughout the last 7 weeks of the year. Initial projections forecasted that profits would fall by 21% from this time last year. However, revised estimates are now well below 10%, as losses are expected to come in at 7.5% – a great improvement in the current climate. However, these are still projections as many of the companies in the S&P 500 are yet to deliver their reports. In any case, it’s clear that many major companies are on the road to recovery – a stark contrast to the fortunes of small to medium-sized businesses that continue to battle an unfavorable economic climate.

The inherent resilience that many established companies have shown, has buoyed overall market confidence and continues to drive expectations. This has led to many investors contributing the resultant higher profits to a V-shaped recovery. If this is true within the medium term, stock prices may well rise much higher than initially thought was possible amidst the pandemic and hurdles facing the broader economy. Interestingly, the month of October had brought with it news of companies exceeding initial projections. However, share prices didn’t respond in line with more favorable earnings reports.

What has changed in November?

As the election has led to a tightly-contested battle for the control of the bicameral legislature, it is becoming clearer by the day that Congress may well be divided. Although Congress may well be divided, this isn’t a bad thing as it keeps the power equilibrium in check and limits one ideology from implementing broad change. Ultimately, it means that policy changes will not be passed overnight, allowing individuals and entities to focus on the fundamentals of the market. The market has thus rid itself of its torpor – pushing the U.S. stock index to new heights since the first quarter of 2020. Coupled with more good news on corporate earnings, stock prices are bound to climb even higher as we head into the festive season.

Looking ahead

It is important to keep in mind that overall profits year over year will still decline by more than 10% in the fourth quarter. As businesses continue to navigate their paths through the harsh realities of the current economic climate, investors are confident that the first quarter of 2021 will see a renewed surge in earnings and subsequent stocks.

Certain asset managers have even reduced positions in tech companies and broadened their portfolio to include shares in sectors such as industrials and financials. The energy sector is still enduring a tough time as oil prices are low and demand nowhere near 2019 levels. Keep an eye out for stocks representative of the consumer staples group and communications services group, as private households shed cautionary spending habits.

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