Market Already Has Priced in Good 2021 Earnings, Says Moody’s

This has been a good year for stocks, despite the sharp coronavirus-inspired February–March drawdown. The S&P 500 closed Friday up 14.8% for 2020 thus far. Just don’t expect much more than a 5% advance next year, warns Moody’s.

How come? Because the market has mostly already priced in next year’s improved earnings, wrote John Lonski, chief economist at Moody’s Capital Markets Research.

“The upside for 2021 has already been reduced by the presumptive pricing-in of good news regarding 2021 corporate earnings,” he declared. He added that next year, “the investment performance of US equities and corporate bonds will be uninspiring at best.”

Earnings have struggled in 2020, and FactSet estimates that they will have contracted 13.6% for the year—but will spurt up 22.1.% next year. If that occurs, wrote John Butters, FactSet’s senior earnings analyst, it would be the largest annual hike since 2010 (39.6%).

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Higher bond yields also will “subtract from the relative attractiveness of equities,” Lonski argued. And those higher yields are coming. The 10-year Treasury has risen to 0.94% from o.5% in the summer.

This is happening despite lower volumes of newly issued corporate paper expected up ahead: Companies issued a record amount of bonds this year to gird themselves for a possible economic catastrophe and to take advantage of low interest rates. (Investment grade corporate bonds rose 53% in dollar terms, to $1.4 trillion.) Ordinarily, a smaller supply should lead to higher bond prices and lower yields. But there will be an abundance of new Treasury bonds.

Plus, other forces are at work. less-risky business climate and a small increase in expected inflation should push up 10-year Treasury yields to an estimated 1.2% from the current 0.9%, the economist indicated. The higher Treasury yields rise, the more stock valuations can fall.

Certainly, bullish calls for the market abound for 2021. JPMorgan, for instance, forecasts that the S&P 500 could climb 25%. Trouble is, market projections have a way of falling flat. In December 2019, the consensus was that stocks would rise 2.7% this year. Right now, they are up five times as much. Since 2000, according to Bespoke Investment Group, the median Wall Street analyst forecast was for a 9.5% market rise in the coming year. Actual figure: 6%.

At the moment, the odds of a spring-back for the economy are based on widespread optimism that the vaccines being deployed will wipe out the coronavirus. Consumers (if they’re not among the legions of unemployed, that is) and corporations are sitting on bushels of cash saved up during the pandemic.

While the stock market is not the economy, the consensus for gross domestic product (GDP) growth is 4% for 2021. That’s above what we’ve seen in recent years. We’ll soon see if that relatively sunny view plays out in share prices in the months ahead.

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Tags: bond yields, Coronavirus, Earnings, Inflation, John Lonski, JPMorgan Chase & Co., Moody's, Pandemic, S&P 500, Stock Market, vaccines

The Government Pension Investment Fund (GPIF) in Japan has started investing $12.5 billion into two foreign environmental, social, and governance (ESG) benchmarks from US index providers Morningstar and MSCI.

The Japanese pension allocated roughly $9.7 billion to a general ESG-themed index from MSCI, as well as $2.9 billion to a gender diversity-themed index from Morningstar, the fund said Friday. Respectively, the two benchmarks are called the “MSCI ACWI ESG Universal Index” and “Diversity Morningstar Gender Diversity Index (GenDi).”

“We consider these two indexes to be firmly in line with our objective of improving long-term returns through enhanced sustainability of individual issuers and the market as a whole,” GPIF President Masataka Miyazono said in a statement. (Miyazono just started in April after several leadership contracts expired at the fund.)

Selected after months of deliberation, the new foreign benchmarks are a signal to global investors that the world’s largest pension fund will continue to incorporate ESG principles into its mammoth portfolio, including supporting greater gender diversity, as it shifts its fund to gain more exposure to foreign equities. In April, GPIF increased its target allocation for foreign bonds to 25%, up from 15% in March.

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The same month, GPIF also said it is seeking both active and passive managers of foreign assets to diversify away from Japanese bonds, which have been flagging thanks to a weakening domestic economy. A diminishing sovereign bond is a major source of concern for the pension fund seeking to secure retirement benefits for a rapidly aging country. Meanwhile, as of December, GPIF said it is still seeking active ESG managers.

In its index posting system, where the pension fund conducted due diligence over index providers, GPIF said it chose MSCI and Morningstar after weighing a number of different factors, including whether they encourage ESG disclosure from firms, clearly disclose ratings methodologies, actively engage with firms, provide indexes sufficiently broad in scope, and whether conflict of interest management structures are deemed adequate.

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Tags: Funding, Government Pension Investment Fund, GPIF, Investment, Japan, Pension