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U.S. earnings recovery may be faster than in previous crises

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(Reuters) – U.S. companies’ profit growth forecasts for the next five years are still intact, according to Refinitiv data, suggesting that the impact inflicted on companies by the coronavirus pandemic is likely to be more fleeting than that in previous crises.

According to consensus estimates data available on Refinitiv, companies in the MSCI United States index .dMIUS00000PUS are likely to post annualized profit growth of 12% in the next five years, double the rate in the past five.

Analysts have not slashed five-year growth estimates in any month this year.

Five-year growth expectations fell over six percentage points between November 2018 and October 2019 on worries over U.S-China trade war. They declined about three percentage points between July 2008 and June 2009 during the global financial crisis.

Graphic – Five-year growth estimates: here

“The current consensus expectation is that earnings will recover sharply from 2021 onwards and that the coronavirus impact will be limited to 2020,” Alain Bokobz, head of global asset allocation at Societe Generale, said in a report.

“In the previous two recessions, the U.S. equity market took around three years to reclaim pre-crisis earnings peak.”

U.S shares have climbed over 40% since March-lows, largely on the back of massive fiscal and monetary stimulus.

SocGen’s Bokobz said double-digit earnings growth is required for U.S. stocks to deliver a 7% total return in the next five years.

Graphic – U.S. companies’ profit growth: here

Analysts expect the recovery will be disproportionate across sectors.

“For sectors like consumer staples and technology, the recovery will be much shorter than the 2008 recession. The reason we may see a swift economic recovery is due to pent-up demand from consumers who have been holed up in their homes for a number of months and have limited spending,” said Matta Fox, founder and wealth adviser at Ithaca Wealth Management.

“For sectors like energy and basic materials, the recovery may take longer.”

As the second-quarter earnings season crossed the halfway mark, U.S. companies had beaten second-quarter earnings expectations by a whopping 24.7%. So far, they have posted a 33.6% decline in net income in the second quarter over last year.

Graphic – Sectorwise earnings growth: here

Sam Hendel, president at investment firm Levin Easterly Partners, said he expects a W-shaped recovery instead of a V-shaped recovery, and a lot will depend on the speed and efficacy of a COVID-19 vaccine.

“This recession is driven by main street due to the necessity to change behavior during the pandemic, and we are fortunate to have a well-capitalized banking system.”

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