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Financial earnings in early 2021 turned out to be better than most were expecting. Ed Hyman—chairman and head of the economic research team for Evercore ISI—wrote in a note to clients, “There’s evidence every day that growth is clearly improving around the world, today from the US to Australia.”
So far, first-quarter earnings have been reported by 34 companies in the S&P 500. According to the Earnings Scout, 88% of those reported have topped their Q1 2021 EPS estimates by an average of 22%.
Recent economic reports back up the strong recovery. Everything from retail sales in March to initial unemployment claims—the lowest since March 2020—to April’s Empire and manufacturing reports from Philadelphia Fed have been showing better numbers than anticipated.
A significant upside to earnings has been expected by traders, but the current state is even stronger than their initial projections. It’s common for companies to report earnings above the analyst consensus, but 22% is a significant jump. Historically, the average beats were around 3%-6%, before 2020.
Nick Raich tracks corporate profits at Earnings Scout and noted that analysts leaned toward conservative when companies withdrew their guidance in 2020.
Even more surprising, some of the early reports were beat by much wider margins. Bank of America beat the projections by 25%, JPMorgan beat them by 48%, and US Bancorp beat projections by nearly 50%.
Will these substantial earnings continue, and if so, for how long? Raich doesn’t believe so.
“Analysts cannot see the future. The reason they’re so far off is because without clues from the companies, they get very conservative,” he said. “As companies give more guidance and the pandemic recedes, you will see the analyst estimates start to narrow.”
However, that’s not a reason to be pessimistic. Earnings estimates for future quarters are what matters most when it comes to stocks — where investment research is crucial — there is still good news.
Raich states that most companies that have already reported are seeing a big positive with their second-quarter estimates increased.
The potential for higher material costs is a concern that some have raised. Higher costs have been reported by several food companies resulting in some of them attempting to raise prices, potentially impacting profit margins.
Lori Calvasina — head of U.S. equity strategy at RBC Capital Markets — recently spoke to the situation in a report, “Given our view that further upside in the S&P 500 this year must be supported by greater than expected EPS growth, we’ll be keeping a close eye on what companies are saying about margin tailwinds and headwinds in the weeks ahead.”
The prevailing belief is that higher costs will either be temporary, or companies can pass them on in a way that doesn’t impact profits. For now, earnings estimates are still on the rise, according to Raich. “If you are going to be bearish, earnings are not the reason. Earnings are sending a very positive signal.”
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
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