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Photo: iStock
Photo: iStock

Corporate earnings to recover, but investors want more stimulus

From the markets’ perspective, this is one key talking point when it comes to the outcome of the US elections, with the two presidential candidates taking divergent stands on the nature and scope of another stimulus

Global equity markets are desperately eyeing another stimulus package and a failure to reach a consensus on the next stimulus would make them nervous.

From the markets’ perspective, this is one key talking point when it comes to the outcome of the US elections, with the two presidential candidates taking divergent stands on the nature and scope of another stimulus.

“For now, the market remains laser-focused on whether there will be another tranche of fiscal relief. With the liquidity impulse waning, this is a needed bridge toward economic recovery," Jurrien Timmer, director of global macro, Fidelity Investments, said in a report on 7 October.

Fetish for fiscal push
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Fetish for fiscal push

“Unless another phase of the CARES Act comes soon, the market’s former valuation tailwind could turn into a headwind. This is why the market is on pins and needles waiting for the next phase of fiscal relief," Timmer said.

Little wonder equity investors are so busy tracking stimulus clues that they seem to have sidelined corporate earnings.

“Factset data show that analysts have increased their Q3 EPS estimates by 4% over the past three months, the first time since Q2 2018 that estimates have risen ahead of the earnings season. This increased optimism for Q3 is well-founded, but it does present a higher bar and suggests that the earnings season is unlikely to provide an upside catalyst for equities. In this context, the trajectory of the debate over fiscal stimulus is likely to remain the key driver of equities in the near-term," Daniel Grosvenor, director equity strategy, Oxford Economics, said in a note on 8 October. EPS is short for earnings per share.

Interest rates across the world are at historic lows, leaving little room for global central banks to act further. So, fiscal policy has to take the onus of economic revival.

Recently Federal Reserve chairman Jerome Powell said he thinks certain areas of the US economy will continue to struggle without more stimulus.

Reiterating the same, the bank’s president Robert Kaplan said central banks cannot solve income problems, so it is up to governments to compensate for loss of incomes through fiscal policy.

Markets are bent on more stimulus because income generation opportunities are likely to remain poor, analysts said. As such, demand revival can be sustained only if there is more support from the governments, they said.

Back home, Union finance minister Nirmala Sitharaman recently said that the government is open to one more stimulus if required. However, given the tight fiscal space, it is anybody’s guess what the quantum will be.

“The timing of the fiscal stimulus is key for both the US and India. It is like the last push they can offer to boost demand. So, the longer they wait, the less effective the stimulus becomes. The delay will weigh on investors sentiment," said an analyst with a domestic brokerage firm requesting anonymity.

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