The old master Andre Kostolany is probably right again this time. He believed that on the stock market 4 is never 2 plus 2, but always 5 minus 1. You just must have the nerve to endure "minus 1". Exactly this case could occur in the coming weeks. The earnings season enters an intense phase in the coming days: 118 companies in the U.S. will give an update on the figures for the fourth quarter of 2020, including the outlook for the current quarter. Among these companies are heavyweights like AT&T, Apple, Facebook and Tesla.
Stock markets have been able to carry much of the momentum from the fourth quarter of 2020 into the current year. This trend is driven by investor optimism about corporate earnings growth in 2021, and in this regard, the current earnings season can certainly provide information to help determine where we stand. "Buy the rumors - sell the fact" is a rule often heard in trading rooms in situations like the current one. Optimism has given the stock markets a tailwind, but where do we go from here? For this, it is perhaps worth taking a brief look back at 2020: In terms of the development of corporate profits, 2020 really does represent an "annus horrbilis". In retrospect, the peak was in the second quarter of 2020. Due to the numerous hard lock-ups, sectors such as energy, industry or the financial sector showed earnings setbacks such as those previously known to the generation of our grandparents in the 1930s. At the index level, the S&P 500 saw its results plummet by around 45% year-on-year, and in Europe the setback was even more severe at just over 50%.
Currently, expectations are completely different: According to an analysis by Ned Davis Research, investor optimism is currently at such an optimistic level that it has only been exceeded in 7.4% of all months since 1994. The mood is as extremely good, the optimism knows hardly borders. But not only the mentioned analysis goes in this direction, also well-known sentiment indicators, put/call ratios - all indicators strike in the same notch. The crucial question is therefore: Is there too much optimism in the market? And an honest answer to this question is: The indications are becoming stronger. The probability of a correction is thus increasing. This does not have to assumed of a Black Swan event.
In addition to the quarterly figures, the outlook of the companies will be of decisive importance. Investors are eagerly awaiting an update on the development of the companies' operating business. In this context, it should not be forgotten that one reason for the strong development on the stock markets of the year starting in April 2020 was primarily the willingness of investors to simply mentally write off the current year 2020. This year, there was nothing to be done for many companies that even had a good business model. As a long-term investor, however, one can make the decision to overlook the earnings shortfall of a single year if at least the subsequent years deliver a good earnings performance. In 2020, this was the basis for rising share prices - and rising valuations at the same time. As a result, valuations on the stock markets are so high that there are no valuation reserves for disappointments. This circumstance also increases the probability of a correction.
On the other hand, it must be noted that a correction in securities markets - provided the companies do not report any catastrophic news - is also not a disaster. Expectations and reality are thus brought back into line. And this lays the foundation for a healthy development on the stock markets. This is exactly what old master Kostolany meant by "5 minus 1".
Risk information/disclaimer: This publication is an advertising document. It is for your information only and does not constitute an offer, quotation or invitation to make an offer, a public advertisement or a recommendation to buy or sell investments or other specific products. The content is written by our employees and is based on sources of information that we consider to be reliable. However, we cannot provide any assurance or guarantee that it is correct, complete or up-to-date. The circumstances and principles underlying the information contained in this publication are subject to change at any time. Information once published should therefore not be understood to mean that circumstances have not changed since publication or that the information is still up to date. The information contained in this publication does not constitute a decision-making aid for economic, legal, tax or other consulting questions, nor may investment or other decisions be made solely on the basis of this information. Advice from a qualified professional is recommended. Investors should be aware that the value of investments can fall as well as rise. A positive performance in the past is therefore no guarantee for a positive performance in the future. The risk of price losses as well as foreign currency losses and yield fluctuations due to an unfavorable development of exchange rates for the investor cannot be excluded. It is possible that investors may not get back the full amount they have invested. We exclude without limitation any liability for losses or damages of any kind, whether direct, indirect or consequential, which may arise from the use of this publication. This publication is not intended for persons who are subject to a jurisdiction that prohibits the distribution of this publication or makes the distribution of this publication dependent on an authorization. Persons into whose possession this publication comes must therefore inform themselves about any restrictions and comply with them.