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Forecasts for shares must reflect a tough reality

Despite some upgrades to profit forecasts, the weak economic outlook is bad for shares
Forecasts for shares must reflect a tough reality

As far as UK companies are concerned there are plenty of examples where forecasts are being upgraded but in many cases expected profits are still a long way off from what companies were making last year.

If I look at the share prices of many domestic facing UK companies and those in the travel and leisure industries, I can only come to the conclusion that they look decidedly unwell.

Even on the other side of the Atlantic the blind faith that the Federal Reserve can keep share prices going up forever seems to be wearing off. Sooner or later the direction of share prices always comes back to one key variable - profits and future profits in particular.

The resurgence of Covis-19 infections across much of the world and the decisions taken by governments to try and slow the pandemic is rightly worrying people who are concerned about the damage it will do to the economy.

It is often said that the stock market is not the economy. It isn’t, but the economy has a big bearing on how much stuff the customers of businesses ultimately buy and therefore how much profit they make.

The growing risk now is that the end of furlough schemes in the UK will see a big increase in unemployment in the months ahead which means those that have lost their jobs will have less money to spend. This week has seen TUI, Whitbread and JD Wetherspoon announce significant job losses and sadly there’s likely to be a lot more to come.

The threat of another lockdown is very real and I fear that the UK economy needs this like a hole in the head. Enough damage has been done and a lot of it is permanent as consumers may have changed their behaviour for good.

Such a backdrop may well favour companies that produce and sell essential goods and services that consumers cannot do without and those with long-term growth potential on top.

 

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