Wall Street: Will the Pace of Earnings Growth Remain High?

Earnings Growth

The quarterly reporting season started on Wall Street a few days ago. In the first three quarters of 2021, analysts’ exorbitantly high sales and earnings growth estimates were largely met. Will this also apply to the significantly weakened forecasts for the final quarter of the year and the coming quarters?

Comparisons, Comparisons

The year 2018 – from today’s perspective a completely normal stock market year – brought excellent growth for listed U.S. public companies. Profits of the 500 companies included in the S&P 500 climbed by an average of 23.2%. Meanwhile sales rose by a respectable 8.7%.

The cause of these growth rates was the tax reform of the then U.S. President Trump, for which he was quite scolded by the media at the time. Nevertheless, the SPDR S&P 500 ETF Trust (SPY) improved by almost 10% in the following 10 months after the tax reform was passed.

Meanwhile, last year’s growth rates apparently exceeded 2018’s, although the final results are not yet known. If analysts’ estimates for the last quarter of 2021 prove accurate, that would mean that corporate profits increased by an average of 45.2% and sales increased by an average of 10.5%. 

Of course, 2020 plays an important role here due to the measures taken to combat the pandemic. The S&P 500 companies were just able to maintain their sales (plus/minus 0%). However they saw their profits fall by an average of -13.0%.

Accordingly, the 2021 figures need to be put into perspective a bit. This is because the quarterly and annual data are compared with the significantly reduced basis of 12 months ago and 2020 respectively.

Still, the bottom line is that in fiscal 2020, S&P 500 members posted earnings of just under $1.25 trillion..

The Price Question

If we look at the evolution of the individual quarters of 2021, we can already see a noticeable cooling – albeit at a high level: +50.1% (Q1), +95.0% (Q2), +41.5% (Q3). For the fourth quarter, analysts forecast average earnings growth of +19.2%.

Similarly, the average revenue growth is +10.4% (Q1), +25.3% (Q2), +17.3% (Q3). For the fourth quarter, analysts expect revenue growth of +11.4%. The big prize question now is: can companies confirm these estimates?

The first two dozen companies in the S&P 500 that have already released their numbers in the meantime have indeed already outperformed analysts’ forecasts for the most part. However, it is of course much too early to draw definitive conclusions.

Significantly Lower Earnings in 2022

What you should know, meanwhile: The forecasts for the first nine months of the current year are significantly more moderate.

A projected +7.9% increase in average sales in the first quarter is followed by projected figures of +6.2% and +5.6% in the subsequent quarters. That still sounds relatively good – but earnings growth is slowing down more significantly in comparison.

For the first quarter, experts estimate earnings growth of +4.3% for S&P 500 members. This is followed by rates of +0.9% in the second and +4.7% in the third quarter.

Let’s do some quick math. On average, analysts say you can expect revenue growth of +6.6% in the first nine months of 2022, but earnings growth of only +3.3%. For comparison, the average figures for the first three quarters of 2021: sales increased by +17.7%, but profits by +62.2%!   

Conclusion

Even if the sales and earnings development in the fourth quarter of 2021 meets or even exceeds analysts’ expectations: in the current year, we will see massively cooled growth in sales and earnings in comparison.

As the saying goes, the stock market is where the future is traded. From this point of view, Wall Street’s performance in the coming months should not only be severely curbed.

Because measured against the forecasts for 2022, the valuations of the S&P 500 companies are far too high and the shares far too expensive.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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