A Sketch to Illustrate What Stocks See Ahead

COVID case counts continue to rise, with the US adding 230,000 cases Wednesday—a surge paralleled in Europe and Asia. Deaths, tragically, are also ticking higher. Politically, a contentious US election year gave way to perhaps an even more tense lame-duck period—including a riot at the Capitol and the National Guard’s deployment ahead of President-elect Joe Biden’s inauguration next week. Economic data, reflecting renewed lockdowns to deter COVID’s spread, show slowing in the developed world’s dominant services industry—even contraction in some European nations. Analysts expect S&P 500 corporate earnings to decline -8.8% y/y in Q4 2020, per FactSet. Individuals in many locales worldwide are isolated from friends and family. The world surrounding us today looks, in some very significant ways, rather bleak.

Despite this backdrop, stocks continue churning higher, leaving many lingering skeptics aghast at the perceived “disconnect.” But when you consider where stocks are looking—3 – 30 months ahead, in our view—the disconnect fades. Here we will attempt to paint a loose picture of what stocks are likely looking to—and how that can influence the evolution of sentiment over the course of 2021.

While few would question 2020’s awfulness on a societal level—or 2021’s start, for that matter—stocks are looking beyond this, in our view. At the shortest end, we think they are looking roughly three months out. That would be around April. By then, the inauguration and tumult that followed 2020’s election should be well behind us. President-elect Biden’s first 100 days—often when a new president’s policy aims take shape—will be almost complete, giving investors more clarity about his agenda. Two of 2021’s few elections—Holland’s and Israel’s—will be over. If recent history and polling are any indication, they will likely be squabbling over how to form fractious coalitions that accomplish little when in office. Vaccine rollouts will assuredly be further advanced, if not significantly so, which has major implications for the services economy. In part due to Q1 2020’s low base, analysts expect S&P 500 earnings to resume growing in Q1 2021—at 16.5% y/y, per FactSet—with reports on this emerging right around three months from now.^[i]

Six months out, we think the backdrop should look brighter still. If the US is even close to the Centers for Disease Control’s vaccine distribution plan, we should be entering phase 2 of vaccination—with health care personnel, essential workers and those above 65 or at high risk already done. Many expect this to be about when a travel and tourism recovery really gets underway. By this time, we suspect we will have a greater sense of what the Biden administration is likely to accomplish (probably far less than hoped or feared, depending on your viewpoint, given tight margins in the House and Senate). Holland may still be talking about forming a government and Israel may be looking at its fifth election since 2019, but we doubt major legislation will be emerging. In Q2 2021, analysts presently project earnings growth of 46.1% y/y with sales jumping 14.1% y/y.^[ii] Of course, those year-over-year calculations look back to extraordinarily depressed Q2 2020 levels. But the moves are huge and noteworthy.

By 2021’s close, will COVID still lurk? Probably, but if governments have any success rolling out vaccines, it doesn’t seem likely to hinder the global economy much. To that end, the median US GDP forecast of 72 collected by FactSet calls for 4.1% growth, with the lowest being 1.8% and the highest 7.1%.^[iii] US politicians will be sweating midterms—especially in a year when House districts in 16 states are expected to be redrawn due to last year’s census. Germany and Japan will have wrapped their parliamentary elections. The holidays should be much brighter than 2020’s gloom.

Beyond that? Too soon to say now. In our view, sentiment has already warmed significantly based on increased political clarity, stocks’ rebound and vaccine news. It wouldn’t shock us if, should the loose picture we have painted play out over the ensuing 11 ½ months, broad sentiment shot further into optimism and, possibly, euphoria. If so, investors likely won’t be worried about the world immediately around them. They will be buying speculative firms based on pie-in-the-sky forecasts of how the world will look in 2041.

We can’t know today, of course if the picture we have painted will unfold exactly like this. Forecasts are rarely precise and headlines and developments likely will emerge—possibly stoking occasional volatility. But we think this general backdrop can help illustrate why stocks’ behavior at this troubling time seems rational to us—and a reason optimism regarding 2021 looks justified.