Stocks fell Monday, just a trading day after shares set records. The market has a lot of good news already priced in, and no new positives surfaced Monday.
The
fell 55.20 points, or 0.16%, to close at 33,745.40. The
slipped 0.81 points, or 0.02%, to end at 4,127.99, and the
dropped 50.19 points, or 0.36%, to close at 13,850.00. The biggest gainer in the S&P 500 was
(ticker: NVDA), which rose 5.6% after the chip maker announced positive product developments at a conference.
Stocks are pricing in a lot of good news already. The Dow–tilted toward value stocks, which are more sensitive to changes in the perceived strength of the economy–is up more than 10% year to date, as is the S&P 500. Valuations are fairly high as well, with the average stock on the S&P 500 trading at roughly 23 times next year’s earnings-per-share projections, compared to many strategists’ call for a valuation multiple below 22 times, as interest rates rise, which erodes the value of future cash flows. Investors are pricing in a sharp economic and earnings rebound as Covid-19 vaccines are being administered quickly and trillions of dollars of fiscal stimulus shores up demand.
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Yet the market is about to be hit by a wave of numbers.
“Things could change in a big way over the next few days as earnings season starts,” wrote JJ Kinahan, chief market strategist at TD Ameritrade, in a blog post.
On those earnings reports, companies need to not only beat estimates, but beat convincingly. Earnings have already been revised upward–and by a lot. Aggregate 2021 EPS for the S&P 500 has been revised up 9% in the past six months, according to FactSet, so companies will either have to beat by wide margins or they’ll have to issue impressive guidance. “We expect another earnings season of strong “beats” that are already priced and expect investors will be more focused on guidance,” wrote Mike Wilson, chief U.S. equity strategist at Morgan Stanley.
Banks will report earnings for the first quarter first, which will shed light on how well the economic recovery is lifting earnings. Two items investors usually watch out for are loan volumes and the amount of cash banks set aside to absorb poor credits. Those metrics give hints as to how healthy consumers and businesses are in.
Now, investors are waiting for earnings–and company guidance–to come rolling in.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
