The Market Should Worry About 2022, Not 2021

Amid a wave of optimism in financial markets, investors can relax about the expected profit rebound in 2021. They might worry more about 2022.

Even as Western nations struggle to contain another jump in Covid-19 infections, most S&P 500 sectors are now up year-to-date. Yet equities didn’t get much of a boost Wednesday when the U.K. approved for use the vaccine made by Pfizer and BioNTech . The power of good news about the pandemic seems to be subject to diminishing returns, raising the question: Is the profit rebound mostly priced in?

Wall Street is factoring in a 22% increase in S&P 500 earnings per share for next year. This seems reasonable, even cautious, following the expected 15% fall this year. This summer showed that consumption can return very quickly when restrictions are eased, and global trade and manufacturing already seem to be on a steady path to recovery. In 2010, after the global financial crash, profit growth was 40% as a result of a dismal 2009.

But forecasts for 2022, the first “normal” year after the crisis, say more about what the market is thinking. Those expectations look less grounded.

As of now, S&P 500 earnings per share are seen expanding another 17% in 2022. This is in line with what happened in 2011, when they rose 15%. Back then, however, profits were far less elevated because the downturn had lasted longer: Relative to their 2007 peak, they were up only 11% in 2011. Current expectations of 2022 earnings place them 21% above 2019 levels. Consumer-cyclical companies such as auto makers and hotels would be up 35% overall.

Source: WSJ

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