As full-year earnings for all the companies in our PE stock tracker app are now available, we see that most of the companies in our Big Tech index have increased their turnover and profits in 2020, despite the mass unemployment and economic turmoil seen by many regular people and small businesses last year. Real economy and finance stocks were a different story. Taken together as a whole, the S&P 500 index of 500 large US companies saw earnings decrease. For one, Exxon Mobil dealt with lessened demand for oil due to the coronavirus fallout during 2020, while the company’s regulatory environment became less accommodative. Net income swung from a $20.1 billion profit in 2019 to a $28.8 billion loss in 2020. Most traditional banks had earnings decreases due to recording adjustments to their net income for future losses on loans. Wells Fargo was the hardest hit in terms of the percent decrease in net income. Net income applicable to common stock at the bank went down from $17.9 billion in 2019 to $1.7 billion in 2020. Compare that to Facebook’s profit growth, from $18.5 billion to $29.2 billion!
A Historical Perspective Of The Real Economy And Finance Stocks
But 2020 is already in the past, and stock prices are forward looking. Current prices seem to anticipate better economic conditions across all three of our indexes. While tech stock prices are at all-time highs, it is a bit harder to see how our real economy and finance stocks indexes are faring from a historical perspective since we just launched our Android app in April 2020, but we know for certain they have bounced back in price since the March 2020 crash.
Like equity assets, housing prices have been buoyant in 2020 thanks to the low-interest rate environment, as well as other factors. (See the S&P/Case-Shiller U.S. National Home Price Index.)
Easy money policies by the Federal Reserve have contributed to low asset prices, as interest rates were at record lows. Recently however, we have seen increases in interest rates at longer-term maturities. For example, the 10-year yield has gone from 0.93% at the start of this year to about 1.50% now.
Assuming that PE ratios of stocks converge over time, the smart move may be to follow the trend of increasing equity prices of the stocks in our financial index. (In recent months, finance stock PE ratios have moved closer to real economy PE ratios, but there is still a gap to close, as the median financial stock PE is 17x and the median real economy PE is 21x.) A continued steepening of the yield curve would benefit banks, which borrow in the short-term and lend long-term.
Potential Catalysts That Can Add Volatility
Some potential catalysts that could add volatility to stock markets in the next few months include expiring eviction moratoriums, which would add unprecedented churn in real estate markets as millions of Americans on behind on rent. For one, a CDC eviction moratorium is set to expire March 31st, 2021. Coronavirus lockdowns in the United States are easing, and that is a catalyst that should give a boost to businesses such as restaurants. That should decrease the unemployment rate.
We are still in the first quarter of 2021, and the stock market likely has some surprises in store for us. While the volume of tech stocks traded has trended down in recent months, activity is picking up in the real economy and finance sectors. Download the PE Tracker app to stay up to date.
- Price Earnings Ratio Stock Value Tracker Team