July 14, 2021
Good morning,
With Q2 earnings season kicking off yesterday, let’s talk about what might be needed this E-season to sustain our Bull market.
We have all grown accustomed to the games publicly traded companies play around their earnings. They tell a rosy story of how they are laying the groundwork this year for strong performance next year. As next year becomes this year, they guide estimates lower. Since 1984, S&P 500 operating EPS has been guided down by 8% points over a given year, on average. Then, on reporting day, they beat expectations. Since 1994, 71% of S&P 500 companies have beaten consensus, on average.
This year, earnings have not followed the typical script. Consensus estimates for FY21 S&P 500 operating earnings have risen by a record 14% since the end of 2020. 87% of companies beat consensus in Q1, also a record.
Considering that P/Es were near record highs at the end of 2020, the S&P 500 likely would not have been able to gain 14.4% in the first half of 2021, its second-best start this century, without the unprecedented upward earnings revisions and beat rates.
What to watch:
Beat rates – can companies continue to top estimates at an historically high pace?
Forward guidance – will companies raise 2nd-half guidance?
Signs of peak growth – will signs of a top ahead remove one of the most bullish drivers of the bull market?
Buybacks – will record profits give companies the green light to resume repurchase?
Be well,
Mike