Commentary Directory
- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Earnings Provide Positive Surprise Despite Pandemic
Jacob Hess
February 18, 2021
- Earnings
- Outlook
Earnings season is more than halfway over as companies continue to report on full-year financial results for 2020. Executives have been busy quantifying the effects of COVID-19 on business operations while looking to an optimistic 2021. Reports have come out for 74% of S&P 500 companies as of February 12th, 2020.
Results so far have been positive with FactSet reporting that 80% of companies beat EPS estimates and 78% beat revenues estimates. If that rate continues, it will be the 3rd highest rate of positive EPS surprises since 2008. Not only have there been more positives surprises, but they have come at a higher rate. The 15.1% average positive surprise margin has been well above the 5-year average of 6.3%. On an annual basis, S&P 500 earnings growth is expected to be at 2.9%. This would be the first positive rate since 2019 Q4 and the largest positive rate since 2018 Q4.

So far, the strongest sector has been communications services with firms in that sector reporting positive EPS and revenue surprises 95% of the time. Information technology, financials, and industrials have all been above average with EPS beat rates above 80%. Struggling sectors were real estate, energy, and utilities. Real estate and energy only saw positive EPS surprises 67% and 55% of the time respectively. Utility companies overall have reported revenue below estimates 86% of the time.
Based on forward estimates of earnings, the S&P 500's price-to-earnings ratio sits at 22.2x, slightly lower than the 22.4x reported at the end of 2020. The Forward P/E is well below the Historical P/E of 39.9x as analysts are expecting a huge recovery in earnings in 2021. In 2021 Q1 and 2021 Q2, earnings are expected to rise 21.2% and 49.4% respectively only to drop to growth between 10-20% in the last two quarters. For the full year, projected earnings growth is 23.6%. Based on this information, the S&P 500 index is expected to increase 11.4% over the next 12 months.

One thing that is driving positive earnings so far is a high net profit margin. At 10.9%, S&P 500 companies are reporting a net profit margin above the 5-year average of 10.5%. The boost in profitability is likely a result of stimulus money to businesses and consumers that is fueling huge jumps in consumption and retail sales. However, firms are also reporting increasing input prices with many measures of producer inflation rising (PMI "prices paid" measures, import-export prices, and PPI). This could put pressure on 2021 net profit margin if companies are not able to pass rising costs on to consumers.
Overall, full-year 2020 earnings have helped the argument for current equity prices. Broad-based positive surprises in both earnings and revenue have suggested that stimulus has been at least somewhat successful in reflating the economy. Expectations for 2021 are huge, though, and rely on vaccinations and stimulus to move in the right direction. One thing does seem certain... 2021 is going to be a better year than 2020 in many, many ways.