An Earnings Season Blowout - July 27, 2021

Investors marched into Q2 earnings season with very high expectations. So far, they haven’t been disappointed.

When the second quarter ended, analysts projected that profits for S&P 500 companies would collectively rise by an astounding 65%, according to Refinitiv. That is up from a forecast of 54% when the second quarter began on April 1.

In part, it’s an easy year-over-year comparison. Recall the lockdown, shelter-in-place orders, and the shutting down of the economy one year ago. Economic activity and profits fell sharply.

Today, we’re in the middle of a strong economic recovery, and earnings are easily exceeding forecasts. With 24% of S&P 500 companies having reported Q2 S&P 500 numbers (through July 23, Refinitiv), profits are up 78% versus one year ago.

Moreover, 88% of firms are beating earnings forecasts made by Wall Street analysts, and many are beating by a wide margin, as illustrated in the table below.

For example, first quarter 2021 earnings rose 53% from a year ago. The forecast by analysts as the quarter ended was 24%.

On average, S&P 500 earnings typically come in slightly ahead of forecasts. Since Q2 2020, firms have far exceeded forecasts, and that has been supportive of stocks.

One recent concern has been the emergence of more contagious Covid variants. Data from the CDC show that new U.S. cases have risen, though they remain well below the peak in January. Yet, except for last Monday’s stock market decline, investors have been primarily focused on the economic fundamentals, including the strong earnings season.

Profits are likely to peak in Q2. But a peak isn’t a forecast for a drop in profits, as we look to the rest to the year. It simply means that forecasters expect the rate of growth to slow.

Final thoughts

Short-term volatility can never be discounted.

Yet, while forecasts in Q3 and Q4 are mostly “guestimates,” as analysts have struggled to incorporate strong economic growth into profit models, rising estimates have contributed to recent market gains and Friday’s record close for the major U.S. market averages (MarketWatch data).