In the US, the consensus of equity analysts currently sees a 26% increase in S&P 500 earnings per share (EPS) in 2021, with a return to peak about a year from now. This is an ambitious forecast considering the current state of the US labour market and the failure of Congress to agree on another round of fiscal stimulus in support of household income. Absent a new round of stimulus, economists at the National Bank of Canada (NBF) fear a relapse of economic activity as labour income takes a hit, forcing some homeowners into insolvency.

Key quotes

“In the US, the consensus of equity analysts currently sees a 26% increase in S&P 500 EPS in 2021, with a return to peak about a year from now. The consensus expects this earnings recovery to be V-shaped and broadbased: seven of the 11 main sectors are forecast to match or top their pre-pandemic EPS. This is an ambitious forecast considering the current state of the US labour market and the failure of Congress to agree on another round of fiscal stimulus in support of household income.”

“Absent a new round of stimulus, we fear a relapse of economic activity as labour income takes a hit, forcing some homeowners into insolvency. The percentage of US mortgages in arrears for 90 days or more has surged in recent months.”

“Risks of deleveraging notwithstanding, S&P 500 financials are outpacing the index as a whole early in Q4 (4.7% vs. 3.4%). What gives? For one thing, the yield curve is steepening – a tailwind for financials. Notwithstanding the likelihood that the pace of expansion will be much slower in coming weeks, financial markets see the growing possibility that Democrats will make a clean sweep on November 3, winning the White House and both chambers of Congress. The odds of this scenario are currently given as 62%, up markedly from less than 50% in September. Such a sweep would increase the odds of a very large stimulus package in 2021 and more upside for inflation.”