The Pandemic Was One Small Step Back For Wall Street, One Big Year Forward

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

If you blinked, you missed it. Corporate profits have nudged back above the level we saw a year ago. The growth trend is back, alive and well.

That’s a real achievement. Through all the shocks we’ve absorbed in the past 12 months, companies on the S&P 500 are now making more money than they were before the pandemic.

It wasn’t trivial or easy. Executives needed to pivot hard when the economy locked down, and a lot of industries are still on the fiscal equivalent of heavy life support.

And yet it worked. Last February, the S&P 500 was raking in cash at an annual rate of roughly $165 per share. Despite all the obstacles, those same companies cleared $170 per share through the COVID-19 year.

That extra $5 spread across the biggest companies on Wall Street isn’t huge in the grand scheme of things. It’s practically an accounting error, barely enough to keep up with ambient inflation.

But progress is progress, especially under extremely challenging conditions. I’m looking forward to seeing what these companies can do when the vaccines start working, people get back out there and the economy regains its equilibrium.

The Inflection Point

Two weeks ago, we were still watching earnings deteriorate on a year-over-year basis. Between the pandemic and collapsing energy prices, the S&P 500 just couldn’t hold the line.

But the latest wave of quarterly reports showed that the market as a whole no longer needs to compensate for adverse conditions. The negative comparisons are behind us now.

And in their place, the projections suggest that it’s going to feel like a boom. It’s basic math: earnings dropped 11% in 2020 and are on track to rebound 23% in 2021, leaving Wall Street with about 10% more profit to play with than we had in 2019.

The shocks of 2020 are receding now. In a year or two, they’ll be a vague memory, along with all the other walls of worry Wall Street has reckoned with and overcome.

Remember the Zika virus? Remember SARS? Ebola? All rocked the market in their day. The coronavirus is well on the way to joining them as a historical footnote.

After all, investing is more about the future than the past. At best, history teaches us how to recognize and anticipate patterns that will play out in the months and years ahead.

A lot of corporations had a miserable 2020, but most survived. The Federal Reserve made sure of that. I’m hoping 2021 will be a whole lot better.

If you’re only focused on the short term, that 23% earnings comparison will be even better than what we saw in the wake of the 2017 tax cuts. In a market starved for growth and flooded with cash, just about anything can happen.

And for long-term investors, the earnings trend once again points up. Simply knowing that the future won’t be actively worse than the past is all we need for confidence on that front.

There’s also a lot of room for error in these numbers. Even if fresh shocks, like a surprise tax hike, force us to cut our 2021 targets by 10%, the math still ends up bullish.

The gains add up fast or slow depending on where you are in the market and how much risk you’re comfortable facing, but they don’t point to a serious crash ahead.

This doesn’t rule out a correction in overextended sectors, of course. Some stocks are more expensive than others and are overdue a leg lower to give the statistics a chance to catch up.

I am not buying Microsoft Corp. (NASDAQ:MSFT) or Apple Corp. (NASDAQ:AAPL) at these levels. They’re great companies that became the bulwarks of the U.S. economy last year, but they don’t have a lot of immediate room to keep climbing.

Financial stocks, on the other hand, still look cheap relative to their growth rates. Buy any other big banks and hold on for the next few years, and you should do all right.

I’ve been loving Goldman Sachs Group Inc. (NYSE:GS) lately. It pays a bigger yield than Treasury debt and unlike the federal government there’s a lot of dynamism here to fund bigger dividends ahead.

All in all, the sector is trading at only 14X earnings right now and that profit pool is tracking 23% growth in the coming year. That’s a textbook buy signal.

I suspect we’ll be chasing quite a few banks in my Value Authority portfolio in the coming year, but as the depressed parts of the economy recover even “value” themes will deliver substantial growth.

Traditional “growth” stocks, on the other hand, are hitting a wall. I’m not looking for MSFT or AAPL to double this year. They’d need to create over $1 trillion in market capitalization to do that.

But smaller stocks remain extremely interesting because they can generate tremendous percentage gains without needing to find such a staggering pool of money.

The young, small companies currently in my IPO Edge are showing a paper profit well above 70% apiece. Most have only been in the portfolio for three to four months.

That’s what I like to see. I’m talking about all of this on my Millionaire Makers radio show. Now there’s a podcast (Spotify)(Apple) as well to keep you focused on opportunities to build real wealth while avoiding obvious threats

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