US stocks could propel higher in 2021 on three upside surprises and break the “three-year curse,” DataTrek said in a note on Wednesday.
According to DataTrek co-founders Nicholas Colas and Jessica Rabe, the curse refers to the stock markets general inability to post three consecutive years of returns greater than 10%.
Since 1928, the market has only posted three years or more of consecutive 10% or greater returns five times: during World War 2, the Korean War, the start of the Vietnam War, the late 1990s bull market, and the aftermath of the financial crisis in 2012, DataTrek said.
Following a 31% gain in 2019 and a likely 15% gain in 2020, the S&P 500 will be staring down the curse in 2021.
But there are 3 potential upside surprises that could propel US stocks higher and help break the curse, according to the note.
1. “S&P earnings could be more like $50/share in Q3 and Q4 2020, rather than the $45-$46/share Wall Street currently has in its models. This is our “base case” surprise, something that is likely to happen but not yet fully incorporated into stock prices,” DataTrek said.
2. “US vaccine rollout and adoption could be faster than expected, supporting the idea earnings might be better than expected since consumer confidence will recover more quickly,” the note said.
3. “Congress and the Biden administration might agree on multiple large fiscal stimulus packages over the course of 2021, taking the risk out of next year’s earnings estimates even if we don’t get $50/share in Q3/Q4. Also, some of that cash would end up in equities, as 2020’s $1,200/person cash payments did,” DataTrek said.
According to DataTrek, the odds are currently not in favor of the market to break the curse, as Colas and Rabe estimate that 80% of all the good news expected in 2021 is already incorporated in the current price of the S&P 500.
“If all we get is a sub-1.5 percent 10-year yield and a 2H earnings run rate of $90/share, then the ‘Third Year Curse’ will likely prevail,” DataTrek concluded.
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