New COVID-19 lockdowns imperil global economy’s recovery

Vaccine roll-outs have been a major reason for investors’ rosy outlook, but concerns about mutant strains have tempered optimism.

A major chunk of the global recovery in companies’ earnings – recovery expected in the first quarter of 2021 – is at risk of being pushed back further as coronavirus lockdowns and mobility restrictions in several countries cloud hopes of a swifter economic rebound, investment banks said.

China announced lockdowns in four cities and European countries unveiled tighter and longer coronavirus restrictions on Wednesday, denting back-to-normal hopes and sparking worries about further economic damage in 2021.

Germany, the United Kingdom and the Netherlands indicated strict COVID-19 curbs would last into early February, and Italy said it would extend its state of emergency to the end of April. Japan also expanded a state of emergency in Tokyo, hurting the prospects of holding an already-delayed Summer Olympic Games.

In the United States, sweeping stay-at-home orders were reinstituted last month in California, the most populous state, as infections surged.

Those actions globally prompted words of caution from major investment banks and other market watchers.

“An additional wave of COVID is among the key risks to be monitored this year,” said Vincent Manuel, global CIO at Indosuez Wealth Management.

“In the past two quarters, we were in the trend of positive earnings momentum both in Europe and in the US, which was coming from the value segments of the market. Now it’s true that should we have disruptions from COVID, it would trigger negative revisions for Q1, but what matters, even more, is the rebound capacity of earnings over the following quarters.”

Analysts’ earnings estimates for the first quarter did not reflect the worry, either. Europe is seen reporting a whopping 40 percent jump in profits, while earnings of US S&P 500 companies are forecast to rise by 16 percent, according to IBES data from Refinitiv. The S&P 500 first-quarter estimated profit growth is up slightly since January 1.

First-quarter and 2021 corporate guidance will be key for investors in the coming weeks. This week marks the start of fourth-quarter 2020 earnings for US companies, with results from JPMorgan Chase and other major banks due on Friday.

“We see risks of downward guidance this earnings season,” Bank of America Equity Strategist Savita Subramanian said in a note on Wednesday, highlighting a consensus on US profits that points to a drop of just three percent versus pre-COVID-19 levels in 2019.

“While additional stimulus could provide upside risks, rising COVID cases suggest a more tepid recovery from here.”

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