By Jeremy C. Owens
Expectations for the corporate earnings reporting season that kicks off in the week ahead have already increased by a record amount, but it still might not be enough.
After profit for the S&P 500 index companies /zigman2/quotes/210599714/realtime SPX +1.47% jumped 52% to a record high in the first quarter of 2021, analysts have been jacking up their estimates for the coming round of financial reports in response. Expectations currently call for year-over-year earnings growth of more than 63% after analysts raised estimates by a record amount, according to FactSet’s senior earnings analyst John Butters .
It would be the first time corporate profit increased more than 50% year-over-year since the U.S. was pulling itself out of the last recession, in the fourth quarter of 2009 and first quarter of 2010, according to Dow Jones Market Data. If expectations are met, corporate earnings would also hit a record for the first half of the year.
Yet the expectations for record profits and huge growth still may not be enough to capture what is about to happen.
“Analysts have been bumping Q2 estimates at a record clip, and they’re still too low. The market knows that,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note. “This earnings season needs to be much, much better than expected.”
Colas pointed out that the estimates still call for a sequential decline in S&P 500 aggregate earnings in the second quarter, to $45.03 a share from $49.06 a share in the first quarter. That would go against established history, which shows that earnings have increased from the first quarter to the second quarter overall.
Investors seem to know, as the S&P 500 index had increased 15.6% year to date as of last week, while analysts’ earnings revision have increased 14% for the second quarter and 8.7% for the full year, Colas noted.
“That tells us that the market knows some version of the upside case we’ve laid out: that the Street’s numbers are way too low,” he wrote.
Butters on Friday suggested that earnings will beat, writing “Based on the five-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth at or above 69% for the second quarter.”
Other analysts agree a larger beat could be ahead.
“We believe EPS will grow 75% led by robust earnings for Financials and Cyclicals,” Credit Suisse chief U.S. equity strategist Jonathan Golub wrote. “Stocks have rallied with surging EPS expectations while multiples have been largely unchanged.”
Many analysts do believe the second quarter will be the peak of the current spike in corporate profit , but do not seem concerned about a slowdown affecting the market.
“What we’ve seen in past market cycles is once you get past the peak year-on-year growth, you do see multiples start to come in a little bit,” Matt Stucky, senior portfolio manager for equities at Northwestern Mutual Wealth Management told MarketWatch. “That’s a sign that you’re more in the middle innings of the cycle, but that’s not necessarily a reason to be underweight stocks or be scared off the stock market, you can still have very nice returns in the stock market when you’re kind of in that middle part of a market cycle.”
“Market participants are keenly aware that level of growth can occur only for a very short period of time,” Wells Fargo senior global market strategist Scott Wren wrote in a note.
“We do not think the markets are worried about economic or earnings growth slowing from these very robust levels, at least at this point,” he concluded.
The number(s) to watch: Banks’ net interest income and margins. The financial sector has been one of the big winners of the earnings spike, with profit in the sector more than doubling in the first quarter and expected to do so again in the second quarter.
Yet, as MarketWatch’s Philip van Doorn pointed out recently , bank stocks have lagged the larger market. One of the reasons he posits is the declines in the yield on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.93% last month, which could hurt margins in the banks’ lending business.