S&P 500 Earnings Still Won't Fully Recover In 2021: BofA

On Wednesday, Bank of America raised its 2020 S&P 500 EPS estimate and made its first projections for 2021. Analyst Savita Subramanian is projecting a significant rebound in S&P 500 earnings, but said investors shouldn’t expect the economy to fully recover its profits until at least 2022.

The Numbers: Subramanian raised his 2020 S&P 500 EPS estimate from $115 to $125, which would represent a 23% decline from 2019 levels. In addition, he has initiated a $155 2021 EPS estimate, which is still slightly below 2019 levels of $163.

“We expect growth to be driven by cyclicals, with Financials, Industrials and Consumer Discretionary generating the strongest gains YoY, whereas record earnings in Tech will have tougher comps,” he wrote in a note.

Bank of America’s 2021 earnings forecast includes projections for 5.6% global GDP growth, 2.8% U.S. GDP growth, a 15% rise in oil prices and a 1.11 USD/EUR.

Subramanian said the biggest downside risks to his new forecasts are post-election tax hikes, a continuation of the fiscal stimulus impasse in Washington and another large wave of coronavirus infections.

To the upside, he said the biggest risk is the widespread availability of a coronavirus vaccine. If a vaccine is available in the first half of 2021, Bank of America said US GDP could get a 1.7% boost, adding $5 to S&P 500 earnings.

Pullback Imminent? The million-dollar question for investors is how much of the economic recovery is already priced into stock prices with the SPDR S&P 500 ETF Trust SPY up 59.1% since late March.

LPL Financial Chief Market Strategist Ryan Detrick said this week in a blog post the stock market’s strong performance in the month of August doesn’t bode well heading into September, which has historically been the worst month for investors.

This year, the S&P was up more than 7% in August. The last two times the S&P 500 gained more than 5% in the month of August, it fell 8.5% in September 1986 and 5.4% in September 2000.

Detrick said 2020 has been the exception to many of these historical norms, but the looming election may create another potential headwind for the market.

“What caught our attention was both September and October have a negative return during election years, with October the worst month of the year. Could investors get election jitters again in 2020?” Detrick wrote.

Benzinga’s Take: So far, the 2020 recovery has closely followed the trajectory of the 2009 recovery from the financial crisis, suggesting long-term investors shouldn’t sweat a potential stock market pullback in September and October. However, given the lofty valuation of the market and the large number of potential catalysts in the next six months or so, investors should be bracing for some major volatility.

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