Weekly Update: Despite Pessimism, Q3 ’21 S&P 500 Earnings Should Be Fine
Brian Gilmartin | Oct 10, 2021 12:20AM ET
The question always is, “Where should investors put their money ?”
- One of last weekend’s posts talked about the expected increase in the “forward 4-quarter” S&P 500 EPS estimate and we were right on the money: the forward 4-quarter estimate last week was $213.65, up from the previous week’s print of $206 and change. That week’s real forward 4-quarter estimate was $213.17 so this past week’s estimate shows a return of the sequential increase in the key estimate.
- The PE ratio this past week was 20.6 vs the week before last's 20.4;
- The S&P 500 earnings yield was 4.87% the week ending Oct. 8 vs the 4.89% using the actual 4-quarter estimate the previous week. The PE ratio is now lower than most of August and September ’21, and the S&P 500 earnings yield is now higher, hence the forward earnings estimate has risen faster than the S&P 500. Trust me, that can reverse quickly.
Trend in Q3 ’21 EPS and revenue growth rates:
All data is paid for through a subscription from IBES data by Refinitiv, but we repackage that data for readers.
With Q3 and Q4 S&P 500 earnings results, readers will see a “return to normal” versus 2020’s COVID-impacted data and then the massive monetary and fiscal stimulus provided by the Fed and Congress.
2022 will look like a much more “normal year” in terms of S&P 500 yoy EPS and revenue growth rates:
Note how expected quarterly, 2022 expected EPS growth rates turned higher again this past week, while revenue turned lower.
We’ll know more with actual Q3 ’21 earnings results since analysts will ask corporate managements about 2022 on the Q3 quarterly calls. Management doesn’t have to answer, but some will.
Here is one note of caution: “rate-of-change”
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Tracking forward estimates, and measuring their “rate of change” over longer time periods note the bottom batch of data shows the “12 week rate-of-change” starting to slow. This could reaccelerate with Q3 ’21 earnings reports, but it bears watching.
h2 Summary/conclusion/h2A number of pundits and bloggers have weighed in on Q3 ’21 earnings expectations and expressed caution over what might transpire, but— while this isn’t advice—the overall pessimism coming into the earnings season is actually a positive. For Nick Colas over at Datatrek, Cam Hui over at Humble Student of the Markets, and even Josh Brown talked about Q3 ’21 earnings season on one of his always-worth-watching CNBC appearances near the close of the market every day, the data is not yet flashing red (or really even yellow) thus far.
The stable-to-upward revisions in forward S&P 500 EPS and revenue growth rates is a positive and a characteristic that we've put a premium on historically. The typical trend from the start to the end of the quarter (before seeing that quarter’s earnings results) is that the estimates tend to start higher and then get revised down slowly over the 90 days and then we see the actual results, with a typical 3% – 5% upside surprise for quarterly EPS.
The upside surprises for S&P 500 EPS since Q2 ’20 have been monstrous. It tells you plenty about analyst models. Expect a more modest “upside surprise” for Q3 ’20.
The current bottom-up S&P 500 EPS estimate for Q3 ’21 is $48.96. Even if we get a modest post-COVID upside surprise of 10% for the quarter (and we’ll know by the end of October whether this is feasible), that will put the Q3 ’21 estimate above the Q2 ’21 final bottom-up EPS estimate of $52.58.
The Q4 ’21 bottom-up EPS estimate of $51.25 has been relatively stable since mid-August when the worries over Q3 ’21 earnings started.
Clients' biggest sector overweights are technology, financials and healthcare at present (which has been the case for some time) and that won’t likely change immediately. Readers should also be aware that energy, basic materials, real estate and utilities are each around 3% of the S&P 500 by market cap summing to a 12% market cap weight, while technology, consumer discretionary and communication services were a combined 51% of the S&P 500’s total market cap as of this past week.
It’s just a personal opinion but we're wary of energy and basic materials at this point given the run the sectors have had. Watch how the stocks react to what should be very positive earnings reports for energy and commodities.
More to come this weekend on the financials set to report this week.
Take all opinions with great skepticism. This article is not advice but should give readers a good feel for what the trends are within S&P 500 earnings.
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