The New York Stock Exchange in Lower Manhattan in New York City.
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Hopes for an outcome fade as the new Covid outbreak casts doubt on the 2021 reopening. That is the story of the winning season so far.
It's the only word investors didn't want to hear: lockdown. Anyway, it's mostly in Europe and only partially. "Lockdown Light" still sounds bad.
We are now in the middle of a spectacular earnings season for the third quarter. So far, 85% of companies have exceeded expectations by an average of 19%, which, according to The Earnings Scout, is well above the historical average of 3% to 5%.
The result is that the market has shrugged. The S&P 500 is 8% below the value it began on the day earnings season began on October 13th.
What went wrong?
It's simple: Wall Street doesn't thrive on past earnings reports, however good they may be. It thrives on future earnings forecasts and they are now at risk of going south.
Wall Street is being hit by a quadruple blow: 1) the reopening is in trouble, 2) stocks are priced high even for an economic rebound, 3) strong earnings reports don't move stocks up, and 4) CEOs are back for most refuse to provide guidance and leave the analysts to their own devices.
What's wrong with the reopening story?
Wall Street was betting that the reopening would continue without lockdowns and that additional momentum would come that would bridge the gap to a vaccine that would be widely available sometime in the second quarter.
Then Europe happened. Germany and France are closing bars and restaurants for at least a month.
Lock? We should learn to live with Covid.
"Lockdowns were off the table, but now we are up against Lockdown Light," said Alec Young of Tactical Alpha, noting that even if there are no full lockdowns in the US, there is a widespread slowdown in economic activity – many simply oppose it Going out, regardless of whether shops and restaurants are open or not, is becoming more and more likely.
Lockdown worries play with the result narrative
The numbers for the third quarter were great, but Wall Street has bet that the following three quarters (Q4, Q1 and Q2) will also improve sequentially as it reopens:
S&P 500 result: high expectations (estimates, YOY)
The "Lockdown Light" story kills a lot of it.
"The improvement in the result is under way. Long downtimes will put an end to this improvement," said Nick Raich of Earnings Scout.
Still no guide for unsuspecting analysts
In the past few days, a number of large companies have reported earnings better than expected, but have refused to provide guidance to analysts. This group includes General Electric, General Dynamics, Boston Scientific, Boeing, Tupperware, Mastercard, Caterpillar, MMM, Xerox, Stanley Black and Decker, Harley Davidson, Raytheon, UPS and Corning.
Typical is UPS, which made excellent profits but spoke for most American companies because it refused to provide guidance "because of uncertainty about the timing and pace of economic recovery."
All in all, you have a high level of macroeconomic uncertainty, with stimulus doubt, lockdown light, uncertainty about when to vaccine and choice.
It's an explosive combination. "What we have is the collision of uncertainty and high valuations," said Rebecca Felton of Riverfront Investment Group in an interview on CNBC.
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