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Why have stocks gone up so much in 2020?

Through Tuesday’s close, the S&P 500 is up 15% this year and more than 60% from the March 23 lows, while the Nasdaq has gained 42% since January 1 and more than 85% since March 23. Julie Hyman, Brian Sozzi and Myles Udland discuss what’s behind the market rally.

Video Transcript

JULIE HYMAN: Like many other things this year, the rally that we've seen in stocks has been pretty unprecedented, especially given the pandemic, given the expectations during the depths of the pandemic. Right. So one of the things that we've talked a lot about this year is why stocks have gone up so much and so persistently in the face of what looked like a lot of headwinds.

And you can point to a lot of different reasons. Right, guys? You can point to even things like the stimulus checks and Robinhood traders and people getting into the market for the first time. But in this morning's "Morning Brief," Miles, you looked at a pretty sort of deceptively simple explanation, which is that people expect earnings to go up next year.

MYLES UDLAND: Yeah. Look, I mean, I said it in the piece. And I think a lot of, you know, people listening to this, people who read the piece later, people who see this video, will be upset by the claim I had made because they think it's overly simplified. But [INAUDIBLE] comes from FactSet. And it just shows that since April, earnings expectations for next year, after crashing in the spring, have been on a tear. They're up almost $20 per share. So we're looking at basically a 20% increase or more in expected earnings next year relative to where they were at the depths of this market sell off.

And so, I think at the end of the day, the simplest reason why stock prices ever go up is because the expected earning power of the businesses that those stocks represent a claim on increases over time.

Now, obviously part of what's driven the market this year is multiple expansion. The market is more expensive. That has to do with low interest rates. I think the retail segment that you mentioned, Julie, is a very important part of this year's market rally. The SPAC dynamic we were just talking about with Victor Nesi at Stifel. That's important, too-- the way capital markets are accommodative to new types of businesses.

But this chart you see here, for my money, is the simplest, most straightforward reason. When someone says, why have stocks gone up, it's because expectations about next year are significantly better now than they were at the depths of this crisis. And yes, I know right now expectations for next year are still slightly below where they were at the end of last year.

But we are now at a point where if earnings come through as expected next year, it could potentially be a record year for S&P 500 profits, maybe only by a couple of cents or a dollar or two. And rarely do you know, realized profits match expected profits. But we're now at that point where 2021 could actually be a record year for corporate profits.

And granted, again, there's a lot of other factors here. But I think, you know, if someone pulls you off the street, why have stocks gone up? Well, people expect corporate America to do better next year. I think that's kind of the simplest thing as far as I can see to go off here.

BRIAN SOZZI: Miles, I read this story this morning. And you made me feel all warm and fuzzy inside. It took me back to my analyst days of playing with discounted cash flow analysis and making earnings estimates. I'm very happy I don't have to do this anymore. But to your point, I'm actually starting to think that earnings estimates, even though they are on an uptrend like you mentioned, they might be too low at this point, given the potential for a revenue recovery, not just in the US, but around the globe for many S&P 500 companies.

Secondarily, a lot of these S&P 500 companies, if not almost all companies in public sphere have drastically slashed expenses during the pandemic. Sure, some expenses are variable. They will come back as revenue recovers. But a lot of this stuff is fixed. We're going to be working at home for a long time. That is a lot of money that is going to be saved by big public companies.

And then, third, I wouldn't expect to see these numbers be reset because you see more consolidation. We were just talking to Victor Nesi at Stifel. There is likely to be a good amount of mega mergers next year, which will cause a reset in earnings and valuations for many companies across the board.

JULIE HYMAN: One thing I am keeping an eye on is something that we talked about a few moments ago with Jess-- is the vaccine rollout. And yes, I know it's very early days. But if we've learned something else from 2020, it's never underestimate the ability of government to be dysfunctional and not perform well.

And so, yes, the scientific community has done an amazing thing here with coming out with these vaccines. But now we've got to get them to people. And so, I do wonder if things proceed more slowly than hoped. I saw some footage-- a news report from Florida where you have people 65 and over camping out overnight to get vaccine doses this morning. You're talking about 90. And they talked to one 90-year-old who had camped out overnight to get a vaccine.

If that's the way deployment is going to continue to go-- and yes, it's early days. I don't know if it will. But if it does and you see some of this recovery pushed out further, maybe those earnings estimates don't end up being wrong. But maybe they end up being too early. I don't know. But it's still some. You know, there is so much optimism baked in right now. And you've got to keep an eye on what could potentially go wrong going into 2021. I think it's important to do so. Our--