Last week’s earnings releases were the starter before the main course starts this week. Major US banks reporting on Friday were selling off on back of Q4 earnings leading the broader equity declines into the weekend. As we alluded to in our review of these banking earnings, the market was overly pessimistic on those earnings as the outlook was improving in the banks’ earnings statement and those outlooks are naturally not factoring in the upcoming stimulus checks from the new Biden administration. This stimulus will act as a backstop on credit deterioration and bolster the banks’ balance sheets providing the opportunity throughout 2021 to release income from the loan loss reserve account. That coupled with reflation trades and the rising yield curve will help US banks this year. We maintain our positive view on US banks in 2021.
The Q3 earnings season was the turning point with earnings rebounding strongly from the bottom in Q2 and expectations are that earnings will continue to grow q/q. The new restrictions that were introduced across many European countries as the second wave of Covid-19 accelerated have likely prevented corporate earnings from increasing significantly in Q4, and thus it is difficult to expect earnings growth y/y in Q4. However, Q1 helped by base effects will begin to show earnings growth y/y, but for the next year the q/q changes will be the only indicator on earnings we can rely on as the large base effects will make y/y numbers meaningless. Based on the current earnings that are for Q4, the MSCI World Index EPS in Q4 is down 6% compared to S&P 500 where EPS is down 10% y/y.