February 22, 2021 BARRON’S 9
STREETWISE
Two-thirds of companies beat consensus earnings
by one standard deviation, or statistically, a
heckuva lot. That’s the second best in 23 years.
Welcome to Earnings
Valhalla. Why Stocks
Can Still Shine
“P
eace of mind
for your
savings and
your fu-
ture,” prom-
ised a bulk-
rate
envelope in my mail pile this past
week. It was a bank pitch for a “high-
yield” savings account paying 0.5% a
year—“10X the national average.”
Meanwhile, holders of Dogecoin, a
parody cryptocurrency based on a
popular internet dog meme, have
made 12 times their money this year.
Thatgivesmeanideaforatarget-
date fund that gradually shifts retire-
ment savings from monetary satire
into inflationary masochism. It’s for
the risk-wary, alpha-curious, prag-
matic absurdist seeking a barbell
laugh-til-it-hurts allocation, and I’m
willing to charge just 1%.
Or I suppose we could just stick
mostly with stocks. Several weeks
ago here, I relayed what money man-
ager Jeremy Grantham told me about
why he thinks the U.S. stock market
is a massive bubble. This past week,
David Kostin, the U.S. stock chief at
Goldman Sachs, told me why he
thinks that the getting is still good,
and that the S&P 500 index will end
the year at 4300—up about 10% from
here, and 14% for the full year.
Start with earnings Valhalla. Life
stunk during the fourth quarter of
last year, based on Covid-19 cases,
foregone holiday get-togethers, and
still-high joblessness. Yet as S&P 500
companies entered the fourth-quarter
reporting season weeks ago, they
were expected to report a year-over-
year earnings decline of just 11%—not
bad for a pandemic quarter compared
with a prepandemic one. Even better,
numbers are now in for more than
80% of companies, and they’ve made
a mockery of expectations.
Two-thirds of companies reported
earnings that beat consensus esti-
mates by one standard deviation, or
statistically, a heckuva lot. That’s the
second-best result in at least 23 years;
the best was the quarter before. It
means that fourth-quarter earnings
for the overall index are now ex-
pected to come in some 2% above
year-ago levels—even though the
economy shrank over the same pe-
riod by an estimated 2.5%.
How’s that?
For one thing, the economy, mea-
sured by gross domestic product,
puts more emphasis on still-strug-
gling industries like restaurants,
whereas the S&P 500 is dominated
by thriving tech giantsApple
(ticker: AAPL),Microsoft(MSFT),
Amazon.com(AMZN),Alphabet
(GOOGL), andFacebook(FB). Last
year, these grew revenue by 18%,
versus a 5% decline for the other 495
members of the S&P 500. Also, com-
panies have cut staff and their travel
spending has plummeted, boosting
profit margins.
Some of that corporate cost-cut-
ting will stick in 2021. Meanwhile,
Covid vaccinations are quickly gath-
ering pace, and the White House is
pushing a $1.9 trillion stimulus
package. “I think you’re really going
to see the acceleration in the second
quarter,” says Kostin. He recently
raised his estimate for 2021 earnings
underlying the S&P 500 to $
from $178. The new number is 10%
above the 2019 record.
If Kostin is right about both earn-
ings and returns, the index will end
the year at about 23 times earnings,
versus a historic average of closer to
15 times. For those numbers to make
sense, inflation must remain con-
tained, and bond yields, very low.
Goldman’s expectation is that the
10-year Treasury yield will creep
from about 1.3% recently to 1.85% by
the end of 2022. Kostin predicts the
Federal Reserve won’t change short-
term rates until at least 2024. “You’re
looking at multiple years of interest
rates basically pinned around zero,”
he says.
That could keep money flowing
into stocks. Goldman has run sur-
veys that suggest stimulus recipients
could direct a larger portion of this
year’s checks than last year’s toward
investments and debt repayment, but
Kostin sees three more important
sources of fresh funds for stocks.
The first is $5 trillion in money-mar-
ket funds, up $1 trillion from a year
ago. The second is Goldman Sachs’
forecasts for a relatively weak dollar
this year, which tends to attract for-
eign buyers to U.S. stocks. And the
third is company stock buybacks,
which collapsed last year, and now
look likely to recover.
S
o there you have it: a bull
case based on earnings, vac-
cines, stimulus, still-low
rates, and money flows.
If you buy individual stocks,
Goldman’s analysts have run a
screen for companies whose sales
tend to surge when consumers
spend; whose sales and earnings are
seen to be topping prepandemic lev-
els; and whose share prices don’t
look nuts relative to earnings. The
names they identified include the
home builderToll Brothers(TOL);
financial-services providerCharles
Schwab(SCH); industrial conglom-
erate3M(MMM); and Facebook.
By the way, Kostin says he doesn’t
own any Bitcoin, which recently
topped $55,000. “I have many, many
colleagues both at the firm and else-
where who do,” he says. Some of
them say they own it as a hedge
against potential debasement of the
dollar. “That’s not my view, but that
is the argument often put forward,”
says Kostin. “I’d have difficulty say-
ing it’s a stable asset given the fluc-
tuations.”
I didn’t ask whether the gradual
mainstreaming of Bitcoin creates a
threat of long-term Dogecoin debase-
ment, but I have my concerns.
I did ask Kostin whether he thinks
Disney World will be busier than
normal if I take the family there in
late summer—he’s overqualified for
that question, but then, I’m a vacation
overplanner with access to America’s
top financial forecasters. “I would say
anecdotally, as well as part of the
modeling, is we are expecting there’s
a pent-up demand and desire for peo-
ple to socialize [and] travel.”
Allow me to paraphrase: Goldman
Sachs says hit the new Mickey
coaster at rope drop before the big
crowds show up. Also, stick with
stocks.B
email: [email protected]
Barron’s Streetwise