The equity markets have taken investors on a wild ride in the last 13 months as the S&P 500 fell by an astonishing 36% in just over a month in 2020. However, driven by tech stocks and federal benefits the index recovered its losses and ended the year near record highs. The S&P 500 ETF in fact climbed over 60% after touching a multi-year low in March last year to end 2020 at 3,700 points resulting in annual gains of 18% last year.
The momentum has continued in 2021 as the index has surged over 10% in just over three months. The upcoming earnings season will be a major driver of U.S. equities and let’s see what investors can expect in the March quarter.
S&P 500 earnings forecast to rise by 24.5% in Q1
According to a report from FactSet, the S&P 500 is forecast to report an earnings growth of 24.5% year over year in Q1. Historically, companies part of this index have managed to beat earnings forecast at a consistent rate. So, there is a good chance that the index will report bottom-line growth higher than Wall Street estimates.
FactSet states, “Based on the five-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth of at least 28% for the first quarter, which would be the highest earnings growth reported by the S&P 500 in more than 10 years.”
In the last five years, actual earnings reported by the companies part of the S&P 500 have trumped consensus estimates by 6.9% on average. Further, 74% of companies in this index have reported actual earnings above mean estimates. This has meant the earnings growth rate has increased by 460 basis points or 4.6 percentage points driven by the “magnitude of positive earnings surprises.”
Earnings beat stood at 19% in the last three quarters
In the last nine months of CY 2020, actual earnings by S&P 500 companies exceeded estimates by an impressive 19% on average. In this period, around 82% of companies part of the index reported earnings above mean estimates which meant starting from the end of the quarter through the end of the earnings season, the growth rate surged by 13.8 percentage points.
Seven of the 11 sectors experienced an increase in EPS estimates in Q1. Further, six of the seven sectors recorded an increase which is higher than their 5-year, 10-year, and 15-year averages.
The beaten-down energy sector recorded the highest increase in earnings estimates during Q1 and this figure stands at a staggering 123.4%.
Companies in the financial sector expect earnings to rise by 13.1% while the bottom-line growth figure for materials and information technology, stands at 12.8% and 9% respectively. It seems that analysts have turned optimistic about overall economic growth.
The GDP growth rate for the U.S. in Q1 and 2021 are higher today as compared to the start of the year. In Q1, FactSet estimates GDP growth rate at 4.8% compared to just 2.7% on December 31. Comparatively, the GDP forecasts have risen from 4% to 5.7% as well.
Rising commodity prices and interest rates might also be driving upward earnings revisions. The price of crude oil is up 22% year over year in Q1 while the value of the S&P GSCI Industrial Metals Index was up 9%. Comparatively, the 10-year Treasury Note increased from 0.92% to 1.74% during Q1. These three factors have driven estimates for companies in the energy, financial, and metals sector higher.
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