Market Overview – 23/02/2021

The corporate results season (for businesses reporting Q4 2020 numbers) is nearly over, but it is interesting to look at the trends given the huge disruption caused by coronavirus. In the US, roughly 80% of companies have beaten estimates, with earnings growing by roughly 7% year-on-year. Revenue numbers are less robust, but still positive for the twelve months, growing by 2% on average. Turning to Europe, around 70% of reporting companies have beaten consensus, but here the numbers look less impressive with both earnings and sales down by around 15% from the previous year. The difference compared with the US is largely accounted for by the higher concentration of energy, resource and financial companies in the European index compared with the US. America also has a much larger proportion of technology businesses which have fared relatively well in the Covid world. Indeed, if you strip the energy sector out of the European numbers, earnings and sales are flat on a year-on-year basis. Stock markets have recovered sharply since the lows of last March. Much of this recovery is based on the expectation that successful vaccination programmes will allow economies to “unlock” earlier than expected. This should also contribute to a strong bounce in company earnings. How much of that is already priced into markets in the short term remains moot, however.

The huge amounts of stimulus provided by central banks and governments during the pandemic have given rise to worries about the possible return of inflation after economies recover (assuming a successful vaccine rollout). This has been reflected in rising bond yields particularly in the US where 10-year Treasury yields are back to pre-pandemic levels (albeit only 1.3%). Previous crises have tended to be addressed with monetary or fiscal stimulus but rarely both. Nonetheless, while there may be a short-term rise in inflation as demand recovers, it is hard to see this being sustainable over longer periods. High unemployment levels suggest there is plenty of spare capacity in the global economy. Meanwhile, the secular trend of globalisation of trade coupled with technology innovation looks set to continue (despite the efforts of Donald Trump to reverse it). There may be many things to worry about in 2021, but high inflation seems low on the list.