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The path of first-quarter earnings will reflect a more normalizing world, says Prudential’s chief market strategist.

March 31, 2021


  • There are increasingly positive signs that the economic recovery both domestically and abroad persists.
  • The first-quarter earnings period will usher in a period in which fundamentals become the foremost issue while macro considerations become somewhat less important.
  • Although earnings are expected to be strong, the market will still be subject to bouts of volatility if interest rates march higher and the inflation “wars” intensify.

Amid a backdrop of increased fiscal largesse, coupled with a Federal Reserve that remains steadfast in its ultra-accommodative commitment and the vaccination campaign gaining pace, upward revisions to first-quarter earnings continue. To be sure, concerns over supply chain disruptions and associated costs wrought by the grounding in the Suez Canal of one of the world’s largest cargo ships, the Ever Given, have to be factored in, as does the potential for another wave of COVID-19-related restrictions.

In addition, supply chain dislocations due to harsh weather conditions across the U.S. this past winter have led to a material increase in costs for producers. The path of interest rates along with inflation implications are the subject of mounting debate, jitters and disparate forecasts on a near daily basis. One thing is certain, however: with costs climbing higher we should expect to hear much more about this from earnings statements and during earnings calls, as analysts ask whether higher prices for consumers can be expected—and whether leaders see higher input costs as “temporary,” as so emphatically stated by the Fed.

Debates over how to pay for a $3 trillion to $4 trillion infrastructure, green energy and long-term health and child care benefits package—which most likely will be divided into two packages—hover over markets, with prospects of higher corporate taxes helping to subsidize the broadened Biden agenda. The broad spectrum of opinion from all factions of the Democratic Party on how much to roll back the Trump corporate tax cuts has begun to hit the headlines, not to mention corporate lobbying efforts to stave off a complete unwinding, accompanied by dire warnings of how higher taxes will jeopardize the economic recovery. If rates are changed from the current 21% to 28% (U.S. corporate tax rates were 35% before the 2017 tax law lowered them to 21%), a rate frequently mentioned as a now viable possibility, overall S&P 500 earnings could be reduced by nearly 8%. Goldman Sachs estimates that political realities will set in and that a corporate tax hike will be in the neighborhood of 25%, which would ease the effect on earnings to a more muted 3%. Clearly, if the Biden administration ultimately deems 25% too low, the market would undergo significant repricing.

But eclipsing these worries are increasingly positive signs that the economic recovery both domestically and abroad persists, and that by fall economic activity for businesses and individuals will look more like what we remember as normal. As fourth-quarter 2020 earnings demonstrably beat analyst consensus estimates, guidance also found a footing as reports featured just slightly more upbeat estimates. While the path of first-quarter earnings similarly will reflect a more normalizing world, particularly with regard to corporate projections, expressions that the economy has finally “arrived” probably won’t be clear until third- and fourth-quarter earnings announcements.

Read Quincy Krosby’s full April 2021 April commentary, “Q1 Earnings – The Rebound Continues.”

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References include the following: Associated Press, Barron’s, Bespoke Investment Group, BlackRock, Bloomberg, CNBC, CNN, Cornerstone Macro Research, The Economist, Evercore ISI, FactSet, The Financial Times, Goldman Sachs, Morgan Stanley, Nasdaq, The New York Times, Politico, Real Money – TheStreet, Renaissance Macro, Reuters, UBS and The Wall Street Journal.

The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This document has been prepared solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The Prudential Insurance Company of America, Newark, NJ, and its affiliates. Prudential and its distributors and representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant. In providing these materials, the issuing companies and distributor listed above are not acting as your fiduciary as defined by any applicable laws and regulations.

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