by Bryan Perry

December 29, 2020

The day after Christmas, The Wall Street Journal ran a front-page article in their finance section (“Covid -19 Propelled Business into The Future. Ready or Not”) which showed how businesses have propelled their future plans forward to digitalize operations to gain efficiencies and thus bigger profit margins.

Much of the article lays out how the pandemic simply accelerated the inevitable – widespread layoffs with limited rehiring of veteran laid-off employees replaced by the hiring of new, younger employees willing to work for considerably less, so the pandemic is triggering a huge reset in the U.S. labor pool.

Here is one example from the weekend Journal article:

Nationwide Mutual Insurance Co. illustrates the shift. Shortly after the pandemic hit, Nationwide had 98% of its 28,000 employees working from home. The initial impetus was safety, but chief executive Kirt Walker said it accelerated pre-existing plans to rely on virtual operations. Before the pandemic, roughly 15% of employees worked from home and the company now plans for half to eventually do so permanently.

“Mr. Walker used to hold town halls with employees in the auditorium at the company’s Columbus headquarters, which can hold up to 350. Now, he has regular companywide broadcasts attended by thousands of employees. They submit questions and vote on which Mr. Walker should answer using Slido, a live-polling application startup just bought by Cisco Systems Inc.

“’We looked at major occurrences in the U.S.: The Great Depression, recessions, world wars, and what we found is that Americans reacted in two different ways,’ Mr. Walker said. ‘First, they were forced to try new things and in many ways. Those new things became habits. Two, people became more value-conscious.’”

“Nationwide is closing 17 offices across the country, keeping four main campuses, reducing its real estate needs by roughly 1.1 million square feet and saving about $100 million, which it says will be used to reduce policyholders’ premiums.

“Some companies, Mr. Walker said, wrote off 2020 as a lost year. ‘For us it was an accelerator, and got us closer to some long-term objectives.’”

Nationwide is among the great majority of businesses conducting the same fast-forward transformation of producing more goods and services with fewer employees and fewer on-site location workplaces. Earlier, I was of the view that much of this work-from-anywhere world would give way to a return to the office or corporate campuses, but now I’m seeing more evidence that remote labor could be a permanent thing.

My niece works for a firm in Washington D.C. and was recently informed that her job is now 100% remote. My son works for a Fortune 100 financial services organization. He was told that he doesn’t need to consider working out of the downtown Denver office until next June at the earliest. Even then, it will be a smaller office presence. My other son works at a private sports agency media group, where he hasn’t seen the inside of their Beverly Hills offices since last March and doesn’t see any plan by management for him or his team returning to the office, even after the pandemic is gone.

This is all anecdotal evidence, but I’m fairly certain that the empirical data would back-up the notion that most corporate business models have leaped forward about 5-10 years ahead of schedule because the advancements in technology were able to make it so. Sure, teams will meet physically to collaborate on projects in various industries, but here too, more of this type of work will be done via high-end video conferencing because, like it or not, it generates huge cost savings and thereby pads the bottom line.

This new normal of work-from-anywhere has limited effect on manufacturing, healthcare, construction, logistics, landscaping, retail, hospitality, travel, live entertainment, sports, home repair, auto repair, personal care services, pet care services, senior living and too many other lines of business to list, but where this new normal has huge and long-lasting impact is in federal, state and local government operations, education at the collegiate level, real estate, law practice, financial services, media, publishing and extensive areas of high-tech, just to name the obvious target sectors. Again, there are too many to list.

The big “so what” in this morphing toward work-from-anywhere for investors is that by the third or fourth quarter of 2021, there could be a sharp increase in S&P 500 earnings that shatter current estimates.

At Navellier, we have a strong admiration for the work Ed Yardeni and his research team compile each month. Ed’s earnings forecast for 2021 of $170 is only slightly higher than the broader analyst consensus of $169.18 and his 2022 forecast of $195 is a bit shy of Street estimates of $197.20. Ed tends to be more bullish than the Street, but the lagging effects of the pandemic are probably keeping a lid on his optimism.

S&P500 Yardeni Research

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Lately, CNBC, Bloomberg and Fox Business have all been trotting out one Chief Investment Officer after another warning of the overvaluation of the current market, now trading at a forward P/E of 21.7 times earnings, based upon $170 earnings in 2021. But maybe the market suspects that the big Y/Y momentum in earnings forecasted for Q2 2021 of 43% ($40 vs. $27.96) carry into Q3 and Q4 as well.

S&P 500 Operating Earnings

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s just my opinion, but the analyst community has been living in a foxhole for most of 2020 in that both the second and third quarter results for S&P 500 revenues and earnings have handily exceeded consensus estimates. For the current quarter (ending this week) and Q1 of 2021, there is guarded optimism about earnings prospects due to the surge in current Covid data both here and abroad.

I think the analyst community might be underestimating just how much productivity is being generated by the remote workforce against the backdrop of rising commercial office space vacancies. The world has changed, probably permanently, for millions of once-office goers. Technology is cutting out and replacing fat at the human level as well as at the physical level and profits for many, if not most, S&P companies are likely to explode higher in the second half of 2021 as the pandemic is, hopefully, fully eradicated.

S&P 500 Index & YRI Forecasts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I’m thinking that the stock market is trading on the notion that the $170 earnings forecasted for 2021 might be way light of final earnings reported in Q1 2022. Current estimates are based on an aggregate operating profit margin of 11% for 2021 and 12% for 2022. What if profit margins are closer to 13% to 15% because of new normal efficiencies? Then we can pull forward 2022 earnings estimates to 2021.

Yardeni has targeted the S&P 500 index to reach around 4,300 for 2021 and roughly 4,650 for 2022. If my hunch is right about S&P companies reporting higher-than-forecast profit margins, then 4,650 could be achieved by the end of 2021 making a 25% gain for the year. Given all the attention voiced about market bubbles about to be burst, isn’t it interesting to see how Teflon the market landscape really is?

Most of Wall Street’s top analysts got it wrong this year. Who’s to say they can’t be wrong in 2021, too?

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Apple Moves into Self-Driving Auto Technology

Income Mail by Bryan Perry
Covid-19 Is Shaping Historic Changes

Growth Mail by Gary Alexander
The Pandemic That Saved America

Global Mail by Ivan Martchev
“America!” is Temporarily Closed

Sector Spotlight by Jason Bodner
How to Avoid Spreading “Viral Contagion” in 2021

View Full Archive
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About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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