9. Corporate earnings have held up surprisingly well this year. S&P 500 2020 consensus earnings are now at $137, down only 15% year over year. Should that level hold, it would mark the mildest earnings recession since 1960.
10. Regulatory policies are likely to tighten in 2021. Next year, we expect President-elect Biden to advance a robust regulatory agenda that reverses much of President Trump’s policies implemented over the past four years. The bulk of the action will likely be concentrated in energy, climate change and labor areas.
2021 Should See An Improving And Self-Sustaining Recovery
A noticeable divide exists between the near-term and long-term outlook. Over the coming months, we think the sharp acceleration in coronavirus cases and the mounting economic restrictions and lockdowns (whether imposed by policymakers or self-imposed by businesses and individuals), are likely to translate into a period of rockier economic growth. We have seen some evidence of this trend: Last week’s retail sales figures were disappointing, and weekly unemployment claims rose for the first time in a while. We also think that the lack of progress on a new fiscal stimulus package will likely hurt growth over the coming months.
Beyond that point, however, the outlook is brighter. The good news surrounding vaccine effectiveness and the prospects for widespread distribution in the first half of 2021 should improve economic mobility. And the Federal Reserve and other central banks have made it clear they will retain ultra-accommodative monetary policies, even if inflation creeps higher. This could create a risk that interest rates will rise more quickly than some expect, but it should also allow for the U.S. and most of the rest of the world to enter into a self-sustaining economic expansion. Some lasting economic damage due to the pandemic is likely, especially in the service sector, but the overall economic picture should look brighter in 2021.
So far, financial markets have been focusing more on the positive long-term outlook than on near-term risks. We think the recent sharp increases in equity prices could make stocks vulnerable to setbacks, especially if economic conditions deteriorate in the coming months. But once we see clearer signs that economic activity is returning to something approaching normal, and that the recovery is more durable, that should create a lasting tailwind for corporate earnings and stock prices.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
Sources:
All market data from Bloomberg, Morningstar and FactSet
Retail sales and industrial production data from the Commerce Department and Federal Reserve
Central bank asset data from Yardeni Research
Earnings data from Raymond James