Q4 GDP Growth Estimates
The Chief Economist at RSM, Joseph Brusuelas, raised his Q4 GDP growth estimate from 2.7% to 4.8% on Wednesday because of November’s trade and inventory data. Remember, even though the quarter is over, only about 2/3rds of the data is out, so we have a lot of room to go until we know where it will end up.
Many are saying we are in a slowdown. That’s quite strong growth for a slowdown, but remember the comp was easy and we don’t have the December data yet. December and January should be the weakest part of this slowdown. We might not even get bad data in January because of the stimulus. The timing of the stimulus now doesn’t look that bad in hindsight since we know it has passed.
As of December 23rd, the Atlanta Fed GDP Nowcast showed Q4 GDP growth on pace to be 10.4% which was down from 11.1%. The next update will be next week on January 4th. I’m surprised by such a long delay given the fact that this is automatic. It’s not like the computers went on winter vacation. The decline last week was caused by the decline in the estimate for real gross private investment growth from 53.8% to 46.9%.
The estimate for real personal consumption expenditures growth rose from 4.8% to 5.1%. Some don’t think the stimulus will impact December’s data. It’s tough to say for sure. How quickly will people spend the $600? Will much spending occur in December with 2 days left in the month? There likely won’t be much stimulus spending in December especially since many people haven’t gotten the money yet.
The NY Fed’s Q4 GDP Nowcast is dramatically different from the Atlanta Fed’s model. It’s usually more negative, but this is a massive difference. The NY Fed’s Q4 GDP growth forecast from last Friday fell 40 basis points to 1.96%. Its Q1 growth estimate is near Goldman’s as it is 5.09%. It fell 45 basis points last week. Of course, the stimulus isn’t included in this model because it only looks at actual economic reports. It’s not a prediction.
The St. Louis Fed Nowcast expects 4.46% GDP growth in Q4. According to the ECRI coincident indicator, November was marginally better than October as the index rose 0.3 to 181.8 and the growth rate rose from 2.1% to 2.8%. The leading index in the week of December 18th rose from 145.8 to 147 which pushed up the growth rate from 13.1% to 14.5% which is at least a 2 year high.
Company Earnings Look Better
Improved economic conditions in 2021 will lead to higher earnings, but even so valuations are stretched. Obviously, if estimates rise a bit more, stocks will look cheaper, but they will never be outright cheap unless they fall as the S&P 500 has a PE ratio of about 22. Obviously, adding Tesla only made matters much worse for valuations as Tesla’s 2021 PE ratio is 170.7 and it is the 6th largest company in the index.
As you can see from the chart above, Citi’s global earnings revision index is the highest since early 2018. Ironically, there was a correction in early 2018 because of euphoria. Will the same thing happen early next year? If there is a crash, it will be larger than that one especially for the tech sector and the Nasdaq.
According to FactSet, earnings are expected to rise 22.1% and sales are expected to increase 7.9% in 2021. That’s following an expected decline of 13.6% in EPS and 1.8% in sales in 2020. This was a short recession which allowed companies to avoid major losses for the year. They were mostly limited to 1 quarter (except for energy).
Industrials are expected to have the highest EPS growth next year with 78% growth. 2nd and 3rd are consumer discretionary and materials which have estimates of 58.9% and 29.6% growth. Financials actually lag the index at 20.9% growth. If rates rise, they might outperform. Tech and healthcare lag at 14.5% and 10.7% growth. It’s a bad idea to be long these sectors into a cyclical upturn.
This doesn't mention energy yet because its growth wasn’t calculated because it lost money in 2020. However, its sales growth is expected to be 15.2% which is the highest. The price of oil is expected to rise to $45.75 from $39.02. Estimates are far too low as we can expect prices to average in the low $60s which is why energy is a favorite sector for 2021.
According to the Earnings Scout, as of December 23rd, 100% of the 13 firms to report Q4 earnings beat estimates and 85% beat sales estimates. GAAP and non-GAAP average EPS growth was 36.26% and 19.99%. We are set to have a weak Q4 earnings season, but that will be the end of this terrible year. A fantastic year for earnings is coming in 2021.
Ironically, in the past few years, stocks have done well when earnings have fallen and vice versa. It’s possible the coming earnings improvement has already been priced in. We’ve definitely seen euphoric action in most sectors with oil and banks being the notable exceptions.
The Earnings Scout shows Q4 EPS growth is expected to be -10.39% which means growth should be in the negative mid to high single digits. Q1 EPS growth is expected to be 12.16% and Q2 growth is expected to be 37.58%.
Conclusion
Q4 GDP growth is expected to be high because of weak comps, but EPS is expected to fall. The good news is Q4 earnings season has started off strong, earnings revisions are high, and estimates are for great earnings in 2021. The somewhat bad news is stocks don’t always go up when earnings are strong.
We could easily see 20% EPS growth and a 5% decline in the S&P 500. That would quickly make the market reasonably valued again. It would take a massive decline in Tesla for it to be cheap, but luckily it has a small impact even though it’s the 6th largest firm. It might even pass Facebook before crashing down to earth next year.
Recent Comments