Investor Confidence Builds With Lockdown-Lite Approaches

The Biden administration coronavirus task force sent a clear message over the weekend that it is not in support of a shelter-in-place nationwide lockdown when it enters the White House in January. 

Dr. Vivek Murthy, a co-chair of the task force, told Fox News Sunday that lockdowns are "a measure of last resort," and the approach to the virus has evolved since the spring from "an on-off switch" to safety restrictions as a "dial" turned up and down depending on severity. "We’ve got to approach this with the precision of a scalpel rather than the force of an ax," he said.

Another Biden adviser, Dr. Atul Gawande, also called for more targeted measures and said different things like mask wearing, widespread testing and capacity restrictions can be deployed and increased or decreased on a localized, zip code-by-zip code basis to get the virus under control.

Lockdown-Lite

Many countries are choosing "lockdown-lites" this time around, as Schwab's research team put it. France, for example, has kept schools, churches, manufacturing businesses, and construction sites open during the current lockdown. "While the reinstated restrictions are weighing on the high-frequency economic data, they may have less of an overall economic impact than the spring lockdowns, which ignited a recession. The stock market seems to agree," wrote analysts in a new note.

Analysts at brokerages Morgan Stanley, JPMorgan Chase and Goldman Sachs are cheering on the stock market rally despite rising cases in the U.S. and Europe. They expect the S&P 500 to end the year at 3,900, 3,600 and 3,700, respectively, bolstered by vaccine advancements, monetary and fiscal stimulus, the economic recovery and high hopes for 2021. 

Earnings Momentum

Analysts polled by FactSet are expecting a return to S&P 500 earnings growth (+14.5%) in Q1 2021. They see the index reaching a new all-time-high for profitability next year with EPS of $168.38. The previous high was 2019's $163.02/share. This would be the fastest return to new-high earnings since at least the 1980s and the more typical recovery time to new-high profits is three and a half to four years, according to DataTrek. For example, after the Financial Crisis, it took the S&P 500 four years to recoup its earnings power (Q3 2007’s $24.06/share to Q3 2011’s $24.86/share). The earnings growth next year, projected at 22.1%, is expected to focus on cyclical sectors like Industrials, Consumer Discretionary and Materials.