Back to Blog
Market Updates

Fourth quarter earnings in focus

Market Update

Fourth quarter earnings

There has been a mixed start to 2021 so far. On Monday 4th January, the first full trading day of the New Year, all the major US stock index futures, as well as the German DAX, hit fresh record highs in the early European session before pulling back sharply. In the days that followed, all these indices bounced back to recover their losses. The buying continued, leading to a fresh set of record highs by the end of the week. This was despite the release of a truly awful US Non-Farm Payroll number on Friday. The data for December showed a loss of 140,000 jobs against an expected increase of 60,000. But investors simply shrugged off the news and carried on adding to their long positions. The prevailing expectation is that central banks and governments have no choice but to continue supplying large dollops of monetary and fiscal stimulus. This view gathered extra credence following the Georgia Senate election run-off in the US which effectively gave the Democrats a majority in the Senate, with Vice-President elect Kamala Harris having the deciding vote on any 50:50 split. This is in addition to their majority in the House of Representatives, along with Biden’s win in the Presidential election. The latter was officially confirmed by Congress last Wednesday, despite the disruption caused by a mob storming the Capitol Hill building. As far as investors are concerned, the Democratic clean sweep is good news for stocks as it means the party should be able to push through aggressive spending plans.

Bubble babble

The New Year has also heard a cacophony of voices warning about bubbles – that is, where investors bid up the price of an asset to such a degree that the price is considered to have lost touch with fundamentals and reality. Perhaps this shouldn’t be a surprise. After all, the Dow Jones Industrial Average is up 70% from the Coronavirus pandemic low hit in March last year. The NASDAQ 100 is up 94% over the same period; the S&P 500 has risen 74% while the more-domestically focused US mid-cap index, the Russell 2000 is up 122%. But even the Russell’s gains are overshadowed by one stock which has really captured the headlines. Tesla, the controversial electric car manufacturer which only announced its first annual profit a year ago, is up an extraordinary 1,100% over the last 10 months. This move made it the fifth biggest US company by market capitalisation, behind Microsoft, Apple, Amazon and Alphabet. It also made Tesla’s founder, Elon Musk, the richest person in the world, overtaking Amazon’s Jeff Bezos. Not bad for a company that was on the verge of going bust just a couple of years ago and which manufactures fewer vehicles than any of its competitors. But it isn’t just US stock indices and equities that are said to be in bubble territory. Last year was the one that saw cryptocurrencies, led by Bitcoin, surge in price again. In little more than three months, Bitcoin rose from $10,000 to $40,000, with a doubling in price between early December and last week. At the start of this week, Bitcoin and Ethereum lost 20% in a single day. But those commentators claiming that the crypto bubble has burst have been proved wrong so far, as Bitcoin and Ethereum have bounced back sharply.

Set to burst?

Asserting that stocks, indices, or anything else are in a bubble doesn’t mean there is about to be a sudden slump. Market moves can often become overdone, whether to the upside or downside. Bubbles can expand well beyond anything that seems reasonable when taking fundamentals into account. Towards the end of a bubble there is a ‘mania’ stage when the price of an asset takes off exponentially. Then something breaks. There doesn’t have to be a specific catalyst for a sell-off.  It’s just that prices suddenly seem unreasonable to a proportion of traders, and a bout of selling ensues which triggers further selling, typically by those who lack a price cushion. They may have been late to the party and bought near the highs; they may have been trading on margin, or both. What could trigger a significant stock market correction now? Anything really. It just needs to come when sentiment turns from bullish to bearish. Then the same piece of news that was previously good for the market becomes negative. While corrections are inevitable in bull markets, just as they are in bear ones, these should not be confused with the kind of sustained price collapse that signals the bursting of a bubble.

Earnings season

This Friday sees the 2020 fourth quarter earnings season get underway when three banking giants report ahead of the US stock market open. We’ll see results from Citigroup, JP Morgan and Wells Fargo. Although the banking sector carries far less clout than it did prior to the financial crisis of 2008/9, these corporations will offer an early snapshot of trading conditions over the last three months. This will be of particular significance given how rising Covid cases and additional lockdowns were offset against the news of the discovery and regulatory approval of three coronavirus vaccines. There’s also the impact of the US Presidential election and the UK’s final exit from the European Union to consider. Year-on-year comparisons of corporate earnings and revenues won’t be a pretty sight. But there shouldn’t be too many negative surprises as analysts’ expectations have been slashed. FactSet, the US data analytics company, is forecasting an 8.8% year-on-year decline in earnings for S&P 500 companies. But investors will be paying far more attention to what corporate managers say about the outlook for the next two quarters. A feature of earnings seasons from last year was how unwilling companies were to offer up forward guidance. If we see CEOs and other senior executives prepared to offer up guidance, and if this is broadly positive, then that could offer support to US stock indices no matter how ‘overpriced’ by standard metrics they have become. But a reluctance to produce an outlook for this year could result in a sharp correction from their current ‘lofty’ levels.

Smart News

To make sure you’re on top of all the news that matters, click on our Smart News widget. You will find it in the bottom right-hand corner of the trading platform. This is where you can access specific feeds with focus on the financial markets, along with the opinions of some of the most influential voices on social media.

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.