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S&P 500 May Eye Higher Levels on Post-Election Stimulus Hopes

S&P 500 May Eye Higher Levels on Post-Election Stimulus Hopes

2020-11-07 09:00:00
Margaret Yang, CFA, Strategist
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S&P 500 FUNDAMENTALFORECAST: BULLISH

  • The S&P 500 index may aim for higher levels with further stimulus hopes after the election
  • Over 86% of S&P 500 companies have beaten Q3 earnings estimates, though profit fell 14% YoY
  • A post-election stimulus package and further monetary easing are likely to cushion pandemic’s impact
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S&P 500 Index Outlook:

The S&P 500 index climbed to a three-week high as election results appeared tilt towardsJoe Biden, who’s victory may point to a larger fiscal stimulus package and the potential to reshape US foreign policy. How the government plans to handle an increasingly alarming coronavirus wave will be a post-election focus.

US corporate earnings have fared well, underscoring resilience of the economy after lockdown measures were eased. So far in the earnings season, 84% of S&P 500 index constituents have reported results, among which around 86% have beaten analysts’ earnings per share (EPS) estimates. If 86% is the final percentage, it will mark the highest share of S&P 500 companies reporting a positive EPS surprise since 2008,according to FactSet.

On a year-on-year basis, the trailing 12-months EPS of the S&P 500 index has declined by 14%, according to data compiled by Bloomberg (chart below). This may reflect that economic activity remained well below the pre-pandemic levels, albeit not as pessimistic as what analysts had thought.

S&P 500 Index vs. Trailing EPS (2015-2020)

S&P 500 Index vs trailing EPS

Source: Bloomberg, DailyFX

Another pandemic wave is sweeping most parts of the EU and the US and threatening the fragile economic recovery. More than 6.5 million coronavirus cases were reported globally in the past 14 days, marking a new high. Daily cases in the US alone broke 100,000 on 4th November, marking a new high. This further underscored the urgency for fresh monetary and fiscal aid to cushion the pandemic’s impact.

This week, the RBA lowered its policy rate to an all-time-low of 0.1% and added A$ 100 billion to its bond-purchasing program, while the BoE added £150 billion worth of asset purchases. The Fed stayed put at the FOMC meeting on Thursday, but the central bank remained open to fresh easing and re-emphasized the need for more fiscal support. While central banks’ accommodative policy stance may shelter stock markets from fundamental headwinds to some extent, effective measures to tackle the spread of the coronavirus might be more critical in the medium term.

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Encouragingly, Markit US Manufacturing PMI climbed to 53.4 in October, reaching its highest level since December 2018. It marked a further improvement in the US manufacturing sector, although the pace of expansion appeared to have slowed down after a strong rebound in the third quarter. Consumer goods producers reported weakened order book growth, reflecting rising virus-related concerns. The outlook remains cloudy with rising virus cases and seemingly a lack of political incentives to implement lockdowns.

Markit US Manufacturing PMI – Oct 2020

US Manufacturing PMI

Back to US markets, the clearance of election-related uncertainty led to a “relief rebound” in US equities this week. The S&P 500 index registered decent gains, with traders eyeing post-election stimulus, potential monetary easing and vaccine developments. Pandemic risk remains a top factor weighing on sentiment though.

The S&P 500 index is trading at around 27 times price-to-earnings (P/E) ratio, which is above its five-year average of 20.3.

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--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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