First Quarter Earnings Season

Companies are once again going through their earnings performance for the most recent quarter, as well as providing updates on their business outlooks.  These “earnings seasons” come with high anticipation because it gives investors the opportunity to reassess how they fundamentally value the companies within their portfolios or find undervalued stocks to capitalize on.

The first-quarter season for 2021 comes with a slightly different tone as both anticipation and expectations are high given the circumstances of the past year.  This same time last year, much of the U.S. was under lockdown orders, and companies unclear of the state of the economy.  This year, as lockdown measures are loosening and the market has rallied significantly, there is much more optimism of better times ahead.

Throughout the first quarter, major equity indexes such as the S&P 500 and Dow Jones Industrial Average, set record highs in anticipation of an improving economic landscape.  As the market pushed higher, valuations have become expensive as seen in the chart below1, with the S&P 500 now trading at levels not seen since the dot.com era. 

Company reports have just begun to trickle in.  As of April 16, 9%2 of the S&P 500 had reported earnings with a majority being large and regional U.S. banks such as Goldman Sachs and Bank of America.  The expectations for year-over-year earnings growth for the S&P 500 prior to the end of the quarter was 23.8%2.  Thus far, the growth in earnings of the companies that have reported is closer to 30%2.  If the remaining companies report similar earnings growth, it would be the highest year-over-year growth since Q3 of 2010.  The chart below3 shows the expected growth of earnings as of March 31 (gray bars) as well as the growth based on the companies that have reported thus far (blue bars).  As you can see, the market is exceeding the growth estimates thus far, but the question is can this sustain as more companies report performance and offer guidance for the year.

Additionally, year-over-year growth forecasts for the remaining quarters are all double digits2:

  • Q2 2021, projected earnings growth of 54.6% and revenue growth of 17%
  • Q3 2021, projected earnings growth of 20% and revenue growth of 10.3%
  • Q4 2021, projected earnings growth of 15.4% and revenue growth of 7.6%
  • Calendar year 2021, projected earnings growth of 27.9% and revenue growth of 10%

Lastly, there is no question that fundamentals have improved from this same time last year but that is battling against stretched valuations relative to history.  This earnings season, as companies report the performance of their businesses and the trends they are seeing, it will be important to determine whether the fundamentals can support the stretched valuations and the bullish sentiment.  Our current approach is one of prudence over aggression.  The markets have had a sustained rally and are expensive at this time, but that doesn’t mean they can’t continue to rise if fundamentals are above expectations.  It is our opinion to stay invested within the framework of your investment plan but remain flexible and opportunistic for future buying opportunities.