Last quarter we wrote that the market was poised for further gains over the course of the year, but that odds for a correction in the short term were higher than normal. We continue to urge investors to focus on the positive drivers for the market over the rest of the year – continued reopening of the global economy, favorable credit conditions, and a fast rebound in corporate earnings.
The broad market indexes have not experienced a meaningful pullback this year, but most segments of the market have pulled back at different times. For example, the energy sector fell about 12% in the second half of January, the technology sector fell about 10% in the second half of February, and small cap stocks have fallen about 11% in recent weeks. These rolling corrections from leading segments in the market can often serve to “reset” the market and set it up for future gains, even if the broader indexes have not corrected. Of course, the broad market will likely decline at some point this year, but that should not deter long-term investors given the positive fundamental environment.
Corporate earnings power continues to be an underreported aspect to this market, in our opinion. On December 31st, 2020 analysts expected S&P 500 companies to have earned 9.4% less in the 4th quarter of 2020 than they did in the 4th quarter of 2019. Instead, they earned 4.0% more, according to data from Factset. This continues a trend of positive earnings surprises since the pandemic began. We think it is amazing that companies earned more in the last quarter of 2020, with an economy hobbled by COVID, than they did in the same period in 2019, when the economy was on strong footing. For full year 2021, analysts expect earnings to grow by 25.4% over 2020. We expect that these estimates will also prove too conservative, thus providing fuel for further market gains.
Our process endeavors to own quality companies that are going up, and tilt your accounts towards the strongest areas of the market. We have experienced volatile moves in many stocks so far this year, and we expect the rest of the year to continue to be volatile. Our process seeks to differentiate temporary market events that should be ignored from meaningful signals that demand investor response. We will continue to follow our objective indicators to keep your account invested appropriately.
