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With uncertainties regarding U.S. elections fading, some investors expect company earnings and economic data to play a greater role in moving stock prices this year.

For months, earnings and economic data have largely taken a backseat as investors grappled with two overarching uncertainties and their ultimate impact on financial markets: the changing political landscape in Washington and the coronavirus pandemic sweeping the globe.

Options data showed that bets on large earnings-related stock moves were profitable only 24% of the time in the last earnings season, compared with a historical win rate of about 40%, according to options analytics firm ORATS.

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Stocks have surged to record highs even as Citigroup’s U.S. Economic Surprise Index, which tracks economic data relative to expectations, has slipped to its lowest level in six months.

“In 2020, the fundamentals kind of went out the window,” said Matt Amberson, principal at ORATS.

Some investors believe that is about to change. The resolution of the Georgia Senate runoffs tipped control of the chamber to Democrats earlier this week. That gave investors more clarity on fiscal policies that will have a greater chance of being advanced in 2021, namely, President-elect Joe Biden’s proposals for increased fiscal spending and higher taxes.

Congress certified Biden’s election victory early on Thursday, hours after hundreds of President Donald Trump’s supporters stormed the U.S. Capitol in a shocking display that weighed only briefly on markets.

“With less focus on politics, there is greater bandwidth for focusing on other issues such as COVID and economic fundamentals,” said James Knightley, chief international economist at ING in New York.

Stocks were mixed on Friday despite data showing the U.S. economy shed jobs for the first time in eight months amid a resurgence of COVID-19 infections.

Investors will get a snapshot of how the economy is performing next week with the release of data on inflation, retail sales and consumer sentiment.

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JP Morgan, Citigroup and Wells Fargo are set to release fourth-quarter results on Jan. 15, among the first S&P 500 companies to post their results for the last period of coronavirus-stricken 2020.

Overall, S&P 500 company earnings are forecast to increase about 23 per cent in 2021 compared with pandemic-hit 2020, leaving investors with the task of figuring out how much of that is sustainable.

Many are likely to be more discerning than they were last year, said Mohannad Aama, managing director at Beam Capital Management.

Investors may be in for a certain degree of rotation, with companies whose businesses were battered by the pandemic in 2020 expected to show strong rebounds this year, analysts said.

The worst-performing sector in 2020, energy, is Mr. Aama’s top pick for 2021. The sector is expected to post earnings growth of 668 per cent in 2021, according to I/B/E/S data from Refinitiv.

Earnings growth for industrials, consumer discretionary and materials is expected to far outpace the earnings growth for the technology sector, data showed.

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To be sure, expectations of fiscal stimulus and ultra low interest rates for the long term fueled “everything rallies” that have buoyed assets from big technology stocks to small caps, convincing some investors that betting on broader gains may be preferable than trying to be too selective. So far, that phenomenon has persisted into 2021, with the S&P 500 and tech-heavy Nasdaq both hitting new highs.

At the same time, investors may return to the “stay at home” trade that benefited big technology stocks if the coronavirus resurgence grows or the vaccine rollout goes awry.

Still, some investors believe a more refined approach may be key to stock selection in 2021.

For most of 2020, “you had a market that really didn’t care if a company missed earnings or met earnings. All it cared about was stimulus and vaccines,” said Robert Almeida, portfolio manager and global investment strategist at MFS Investment Management.

Now, “the market will be forced to reorient its attention on micro versus macro,” he said.

-- Saqib Iqbal Ahmed, Reuters

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This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

SunOpta Inc. (SOY-T) This stock is trading at record highs amid growing demand for its plant-based food products and as more people eat at home during the pandemic. Its products are sold at Starbucks and analysts remain bullish, with some believing 2021 will be a “breakout year” for the company. Brenda Bouw reports (for subscribers)

The Rundown

TSX breaks past 18,000 for the first time, fully erasing pandemic-sparked losses

Canadian stocks hit record highs on Thursday for the first time in nearly 11 months, officially erasing the losses of the pandemic-sparked crash in stock prices, and capping off one of the most remarkable recoveries in the country’s stock market history. Tim Shufelt looks at why the bullish run won’t end soon. (for subscribers)

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Also see:

Emerging-market stocks hit record high for first time since 2007

Investors reposition for stimulus, spending and tax as they look to Biden

Wall Street wary of ‘frothy’ stocks, bubbly bitcoin

Wall Street bankers are warning of toppy stock markets and a looming near-term retreat after exuberance from unprecedented economic stimulus has led to “frothy” asset prices. Thyagaraju Adinarayan of Reuters reports. (for subscribers)

Three top stock picks from Scotia Wealth’s Stan Wong for what comes next in the pandemic

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While many investors were riding out the market volatility in recent months, Stan Wong was actively buying and selling, including in some of the hardest-hit sectors such as travel and leisure. Brenda Bouw tells us about his latest stock picks. (for subscribers)

The Canadian dollar is on a tear. How much more can it rally?

The Canadian dollar has embarked upon a strong recovery over the past 10 months, and some observers expect that the loonie’s flight will continue with a receding pandemic, stronger global economy and rising commodity prices. David Berman reports. (for subscribers)

Also see: Latest poll on where 40 analysts see the loonie heading over the next year

Others (for subscribers)

The week’s most oversold and overbought stocks on the TSX

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Friday’s Insider Report: Bill Gates trims his position in this large-cap Canadian dividend stock

Thursday’s Insider Report: Company leaders cash out millions from this cannabis stock that just hit a record high

Number Cruncher: Six dividends for investors that benefit from cryptocurrencies and blockchain

Number Cruncher: Eight mutual funds for investors aiming to minimize carbon risk

Globe Advisor

Six ESG ETFs for an RRSP

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Ask Globe Investor

Question: For tax purposes, is it better for me, as a Canadian, to receive dividends in Canadian dollars or U.S. dollars? Or is it tax neutral? – Frank S.

Answer: The currency in which you receive the dividends isn’t the issue. Rather, it is the nationality of the company making the payments. For example, Toronto-based Brookfield Asset Management declares its quarterly dividend of $0.12 a share in U.S. currency but, as it is a Canadian company, the payment is eligible for the dividend tax credit.

The tax credit is a significant advantage. For example, an Ontario resident with $75,000 in taxable income has a marginal tax rate of 29.65 per cent in 2020. But the tax rate on dividends eligible for the credit will be only 7.56 per cent, according to accounting firm EY.

Dividends from U.S. companies get no tax break. They are taxed at your marginal rate, just like interest income. Moreover, there is a 15 per cent withholding tax on dividends from U.S. companies, unless the payments are made to an RRSP or RRIF.

--Gordon Pape

What’s up in the days ahead

Ian McGugan examines why low interest rates are hardly a justification for sky-high stock valuations.

The great reflation: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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