Earnings Growth Supports Strong Equity Market Advance

Summary

• Q4 2020 earnings reports are nearing an end, with nearly 80% of companies reporting earnings above analyst estimates, exceeding the long-term average of 65%.
• Expectations for the next two quarters show earnings growth accelerating, with the Q2 2021 estimate currently indicating growth of 51.2% on a year-over-year basis.
• The strong earnings recovery supports a similar recovery in the S&P 500 Index.

Fourth-quarter 2020 earnings reports are nearing an end as 495 companies in the S&P 500 Index have reported results. Refinitiv's report dated March 5, 2020 notes results have come in better than history. Nearly 80% of companies have reported earnings above analyst estimates, exceeding the long-term average of 65%. Expectations for the next two quarters show earnings growth accelerating, with the second-quarter 2021 estimate currently indicating growth of 51.2% on a year-over-year basis.

The below chart shows the 12-month forward earnings growth estimate along with the S&P 500 Index. The strong earnings recovery supports a similar recovery in the S&P 500 Index. S&P earnings for calendar year 2021 are estimated to equal $174 versus $141 in 2020. The earnings expectation for calendar year 2022 is now over the $200 threshold at $201.

It does seem by some measures that the equity market is priced for perfection. With the strong and steady recovery in earnings in this still-low interest rate environment though, stocks should continue to deliver acceptable returns. The equity market does not move higher in a straight line, so market volatility should be expected though.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[mysonchino]

Our Fed and also Japan have been trying to kick start inflation for years and in Japan decades. They have been unable to do so. Technology, effeciciency, productivity and demographics are holding inflation back. This will continue and inflation will not be the issue Zandi fears.

The thing to remember about market talking heads is that if the ever were considered "hot" and now they are not, is they want to be "hot" again. The only way to get back to be king of the hill is to make bold predictions. If they don't happen no one remembers. If they by chance do occur you are a genius once again.

If the talking heads are so smart why do their funds all earn around the same thing or less than the S&P? Also, according to AllienceBernstein over the past 70 years if you bought only at the highs you only make 1.9% less than if you always bought at the lows.

When read troubling reports from talking heads I do the smart thing and ask my cat. Cats are wise creatures. I get just as good advice from my cat as the "wanna be hot" crowd because my cat doesn't seek fame and attention and has the same ability to predict.

[AwokenTheLBC]

What are your thoughts of the likes of moodys Zandi warning of immense inflation pressure around the corner? I don't see it except in housing which is a demographic economic issues that is priced in fairly well. No other sector has supply imbalance if anything I see supply glut ntm labor slack. Somebody take the other side of the trade.