Stock market sets high bar for earnings season

Yahoo Finance’s Myles Udland and Brian Sozzi discuss what to expect for Q1 2021 earnings season.

Video transcript

MYLES UDLAND: All right, let's talk a little bit about the upcoming earnings season, which is going to get underway, Sozzi, later on this week. We're going to get bank earnings rolling in. Bank earnings are always interesting because Matt Levine famously wrote this five years ago. It's sort of, who could really say what a bank any-- ever earns in any one quarter, but we'll get some commentary from the banks about what they're seeing in their loan books. Certainly, demands for mortgages is going to be an important part of what we hear, at least from JP and Wells. We'll get a sense of what happened or hasn't happened in the investment banking business.

But thinking broadly about earnings season here. We have seen expectations ramp up over the last few weeks, but actually plateau just a smidge in the last, let's say, 10 days, as we head into this earnings season. Does this feel like we're going to be looking at the fourth quarter, in your mind, where earnings beat to the upside, or are we ripe for a disappointment here?

BRIAN SOZZI: Well, Myles, one thing I think we could confidently say, the quarter out of Wells Fargo is probably going to be pretty brutal. Continuing the theme that has been from that company really for the past year is the deal with the host of internal challenges, and executive shakeups, and a whole lot of firings. But nonetheless, to your point, that's right, Myles, you're actually starting to see this-- this earnings season, according to FactSet, 61 companies out of the S&P 500 have already issued positive preannouncements on earnings.

Now, only 35 issue negative warnings, but I'm really interested in, Myles, can companies come out and beat those higher expectations? And that will be critical. And I know you wrote about this in your newsletter today. We'll talk more about it later, but it's going to be very important that companies come out, beat and then guide higher by more than the beat for the full year.

I hope that makes sense, but if you think about it, it does, because valuations for the S&P 500 are above 10-year averages. The P-- 4P multiple on the S&P 500, 22.4, according to FactSet. The 10-year average is 15.9 times. Overall, that says to me, there are a lot of market expectations, a lot of expectations financially priced into stocks here.

MYLES UDLAND: Yeah, I mean, you know, you bring up valuation. So, we have to do the whole dance once again. Valuations have not gone up in the last nine months. So, I really-- I'm just really not interested in hearing about how high valuations are a problem, and really in any context, because the market has gone up 50% over that time, and it hasn't been an issue.

So, that's not really compelling. But I do think, Sozzi, like, you look at the conditions here for what creates the next market catalyst. And I think that's kind of what we've been asking ourselves for the last few weeks. Everyone knows that earnings are going to be good this year.

Everyone knows that economic growth is going to be 8%, 10%, maybe 12% as we get into Q2 and Q3. So, is anything that we hear from companies over the next couple of weeks going to be enough to outline a future that investors get excited about, outside the context of, well, the Fed stay is easy, and stocks remain kind of an attractive place to be allocated?

BRIAN SOZZI: Yeah, I think the one catalyst, Myles, and we're seeing it this morning, Microsoft buying [INAUDIBLE]. I think how companies are going to allocate their cash and how they articulate that to investors is going to be very important. Whether they come out with a big new buyback plan or they're raising their dividend. We have seen both instances of that in recent weeks among early reporters, but how they allocate cash is going to be very important. It could be the next major market catalyst.

MYLES UDLAND: Yeah, do we get some kind of new investment cycle on the back of this? New kind of growth trajectory, at least in the eyes of corporate America. Certainly a theme to watch out for. All right--