Mr. Roemheld, corporate earnings are an important factor in the development of stock prices. In the past year, business was bad for many companies, but prices rose nonetheless. What was that?
The profit expectations are only one component for the expected price development. The shorter the period under review, the more the share prices are overlaid by other developments, which are then expressed in the valuation ratios. In 2020, the earnings trend played almost no role for the stock markets: The significantly falling earnings were offset by drastic monetary and fiscal policy measures. They are the main drivers of the significant price increases.
Will this trend continue?
As long as monetary and fiscal policy support continues, share prices should continue to be well supported. In the case of further fiscal and aid programs as well as positive news regarding vaccine development and supply, I definitely see further potential for catching up, especially with regard to cyclical values. Since these have higher weights in the European indices than, for example, in the USA, this, together with the expected profit development, speaks for a better development of the European markets in relative comparison.
What are your expectations for the development of corporate profits?
A closer look reveals very large deviations in the estimates between 2020 and 2021. As is known, profits fell significantly in the past year. According to our estimates, they will grow just as significantly in Europe this year – more so than in the USA. In Europe, excluding the UK, we expect earnings growth of around 50 percent in 2021, while earnings in the US should only increase a little more than 20 percent. In Asia, we anticipate around 30 percent growth. Of course, these numbers are still characterized by great uncertainty.
You spoke of the cyclical, i.e., business cycle-sensitive values. Presumably their profits will increase more strongly?
I agree. We expect by far the highest growth rates globally for the more cyclical sectors such as energy (plus 130 percent), discretionary consumption (plus 72 percent) and industrial stocks (plus 60 percent). The recovery in earnings is likely to be weakest in utilities (up 13 percent), healthcare (up 14 percent) and consumer staples (up 12 percent).
And in Europe?
Europe excluding the UK has the highest estimates for discretionary consumption, automotive and retail, while pharmaceuticals and food retail have the lowest growth rates.
That all sounds very optimistic. What are the risks to this forecast in the New Year?
On the one hand, there are risks in the significantly larger and in some cases irreparable consequential damage from the pandemic, which from today’s perspective cannot be clearly quantified and which could make a quick recovery much more difficult. On the other hand, there is currently a lot of hope for the quick and effective introduction of vaccines. Should there be delays or other setbacks in this development that make an early end of the pandemic unlikely, the short-term correction potential for the capital markets would be high. However, I see the greatest risk in an overshooting of inflation rates due to the strong increase in the money supply and large fiscal programs, which, in addition to the tendency towards more protectionism, are driving up prices. Without the appropriate countermeasures by the central banks, higher interest rates would be poison for the stock and bond markets.