Finally, there is corporate earnings, the lifeblood of the stock market. Companies beat Wall Street earnings estimates by 16% in last year’s fourth quarter, the third-widest margin in history. The other two biggest “earnings’ beats” in recent history came in the second and third quarters, he said.
Orlando believes many companies used the pandemic to become leaner, while boosting their productivity via technology. He expects earnings on the S&P 500 to rise from $150 a share last year to $180 in 2021. “If we’re wrong, we’re wrong to the downside,” he said.
Federated Hermes now believes the S&P 500 will reach 4,500 by year-end. That means a gain of 25% for all of 2021—less than the 75% jump it recorded in the final three quarters of 2020, but impressive nonetheless.
Orlando acknowledges that Biden’s stimulus bill has its skeptics. Former Treasury Secretary Larry Summers has estimated that the output gap stands at about $600 billion and the Biden stimulus is three times that size. Summers is hardly the only one question the size of the stimulus.
But this recession is very different from the financial crisis 13 years ago. Back then, there was lots of blame to go around—from banks that designed complex, subprime mortgages that exploded to consumers who unrealistically leveraged themselves.
This time the pain has hit people at the lower end of the income ladder who live paycheck to paycheck. Orlando notes that the unemployment rate for college graduates is 3.8%. For those with only a high school education or less, it’s 10.1%.
The effort Washington is attempting to engineer “should be aimed at this group,” he said. Many people in low-wage service jobs find themselves “out of work through no fault of their own. They need a bridge to get them to the place where the economy can support them on their own.”