Employment projections are low. What that means for stocks

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Analysts have been racing to revise employment estimates up late, but these projections may still be too low. That could mean more upside for stocks even though the market has been hot lately.

Estimated results for 2021 for the average

S&P 500

the company has revised upwards by 8% in the past six months, according to FactSet data. Covid-19 vaccines have found arms at a rapid pace, allowing states to reopen, met with pent-up demand as a result of trillions of dollars of fiscal stimulus. With that in mind, up-to-date reviews may not be so frequent.

But of course there is more upside in employment, according to an analysis from

Credit suisse

strategists. For every percentage point of gross domestic product growth, revenue growth on the S&P 500 is nearly double that, historically, Credit Suisse said. With GDP expected to grow just over 7% in 2021 – the fastest chip in decades as the economy normalizes after the 2020 locks – S&P 500 revenues could grow around air 14%.

But analysts are only expecting overall sales growth on the index of around 9% for the year, according to FactSet data. Considering conventional revenue estimates, Credit Suisse’s analysis results in about 4% upside over sales forecasts.

Benefits would have more potential to arise. For many S&P 500 companies – think manufacturers, retail businesses, and food chain operators – more sales often means even higher profit growth. That’s because these companies have a high operating capacity: A significant portion of their costs don’t change much, so when sales rise, profit margins widen and employment grows strongly .

Credit Suisse predicts EPS growth of 34% in 2021, higher than the consensus estimate of 25%.

Would a higher expectation pump up stock prices significantly? One challenge is that stocks are already showing a high level of optimism. The S&P 500 is up almost 20% since the end of September, when investors began buying up stocks that were sensitive to changes in the economy.

That has brought valuations to very high levels, with the average stock on the index trading at just under 22 times the expected earnings per share for next year, compared to long-term average of 15 hours.

But interest rates have been going up recently, leaving stocks less attractive. Many on Wall Street will see the S&P 500 trade down to 20 times more earnings than expected next year. While greater stock profits could be expected to help, the gain would be offset to some extent if shares are trading at a lower expected level of earnings.

The most economically sensitive stocks are some of the best for playing an employment story. Bicycles have run hot, but some still look good.

Norfolk and South

(ticker: NSC) they could earn $ 16 per share by 2023,

Citigroup

analysts wrote in a note. That would put the rail and transportation company on track to grow employment at a rate of 20% for the next three years, up from FactSet 13% data showing that Wall Street analysts are currently expecting. While the stock has been trading above its average price / earnings ratio for the past five years, Citi analysts still see room for a 37% gain in the shares.

Write to Jacob Sonenshine at [email protected]