A major chunk of the recovery in companies’ earnings expected in the first quarter is at risk of being pushed back further as lockdowns and mobility restrictions in several countries cloud hopes of a swifter economic recovery, investment banks said.
China announced lockdowns in four cities and European countries unveiled tighter and longer coronavirus restrictions on Wednesday, denting back-to-normal hopes and sparking worries about further economic damage in 2021.
Germany, Britain and the Netherlands indicated strict COVID-19 curbs would last into early February and Italy said it would extend its state of emergency to the end of April. Japan also expanded a state of emergency in Tokyo, hurting the prospects of holding an already delayed Summer Olympics.
Those actions prompted words of caution from major investment banks. Goldman Sachs said signs of gloom were creeping in with, 48% of its clients expecting economic growth to undershoot expectations of 5.3% growth in 2021.
Analysts’ earnings estimates for the first quarter did not reflect the worry either – Europe is seen reporting a whopping 40% jump in profits, while the United States is forecast to see a 16% rise.
“We see risks of downward guidance this earnings season,” BofA’s equity strategist Savita Subramanian said in a note, highlighting a consensus on U.S. profits that points to just a 3% drop vs. pre-COVID 2019 levels.
“While additional stimulus could provide upside risks, rising COVID cases suggest a more tepid recovery from here.”
There were some cracks appearing in expectations of a V-shaped bounceback in earnings, with the pace of upward revisions in global earnings estimates cooling down in recent weeks.
Graphic: Global earnings upgrades slowing
Still, U.S. and European companies were seen reporting profit growth of 20.8% and 38% respectively for 2021, according to Refinitiv data.
Vaccine rollouts have been a major reason for the rosy outlook picture.
“There is widespread hope that a Covid-19 vaccine rollout in 2021 can normalize the underlying real economy and increase earnings, employment and margins,” said Steen Jakobsen, chief investment officer at investment bank Saxo.
“The risk is that new mutations of the virus will dilute our attempt to normalise our society with the first-generation vaccine.”