Energy, industrials and materials sectors top gainers in fourth quarter

Stimulated by concerns over the "three-piece set" of reducing bond purchases, raising interest rates and shrinking the balance sheet, U.S. stocks started the year with the longest losing streak since September last year. The Nasdaq posted its worst performance in nearly a year last week, with the 10-year U.S. Treasury yield rising sharply to 1.77%, challenging the highs reached early last year.

A lot of negative news flooded the market, as well as the US December CPI to be announced tonight. The data in November was a year-on-year increase of 6.8%. The market expects that this month may reach 7.1%, setting a new high in 40 years.

Federal Reserve Chairman Jerome Powell said at Monday's hearing that the economy after the epidemic may be different from the previous expansion, and the US labor market is strong and policy must be considered forward-looking, further deepening market concerns. In addition to a lot of bad news, this week, major US companies began to announce their financial reports for the fourth quarter of last year one after another. The market will usher in a test, but it may also be an important support for boosting the current market sentiment.

Corporate earnings are still enjoying post-pandemic recovery dividends. The market currently expects the S&P 500's fourth-quarter earnings to increase by 21.7% year-on-year, and the actual growth rate is likely to be further revised up. This figure is a bit higher than the average growth, but lower than the growth rate of the past few quarters. On the basis of the low base in the early stage of the epidemic, the profit growth of U.S. stock companies reached a high point in the second quarter, an increase of 96%, and fell back to 30% in the third quarter. With the fourth quarter, the annual profit growth rate is expected to be 45%.

However, the situation in 2022 will be significantly different. The low base effect is almost gone, and corporate profits will still face challenges such as rising energy prices, labor shortages, rising wages, and supply chain bottlenecks. Earnings will grow by just 9.4%. But the market always trades on expectations, and if corporate earnings are stronger than expected, there will still be decent share price performance. Most corporate earnings have improved substantially in 2021, but in 2022 we will see a more differentiated earnings among different companies.

Before the start of the fourth quarter earnings season, 93 S&P 500 companies issued earnings guidance, of which 56 issued negative EPS guidance and 37 issued positive EPS guidance. volume, surpassing positive guidance for the first time.

However, this does not mean that corporate profits are not strong, but that the growth rate of profits after the epidemic returns to the normal path that is reasonably expected.

In terms of sectors, cyclical sectors such as energy, industrials and materials are expected to continue to record the largest earnings growth, and the growth rates of both energy and industrial sectors may exceed 100%. Healthcare and technology are also expected to post double-digit growth, but not as much as the broader market. Discretionary consumption and mandatory consumption have been repaired more in previous quarters, and this quarter's performance may be relatively flat.

For this week, you can focus on the performance of a few big banks, including JPMorgan Chase, Citi and Wells Fargo, for a bellwether of overall economic health. The stocks of these companies have risen by 21%, 1% and 67% respectively in the past year, which is very different.

Thanks to the hot M&A transaction business and the large release of bad debt reserves, many major U.S. banks achieved the best performance in history in the first few quarters. In the third quarter, the total profits of the four major U.S. banks reached 28.7 billion US dollars, and industry profits increased. Speed ​​was revised up to 30.6%. The S&P financial index rose 35% for all of last year, outperforming the broader market and its best performance in the past decade.

The ensuing environment of rising interest rates tends to be conducive to higher bank profits, but at the same time it has to deal with less favorable factors such as IPOs, bond issuance and mergers and acquisitions that may cool down, as well as a slowdown in macroeconomic growth.