Bank of America Global Research adopted a similar tone in a note to clients this week, reminding them that profits from misfires are extremely rare, but he added that the "focus will be on the forecast " which has started to ease and will lead to a downward revision of EPS 2022. "We believe it will be a breakthrough quarter with all eyes on margins and supply chain, "the team wrotebank research.
Since the first quarter of 2020, which was the only dud in the last 48 quarters, earnings growth reached as high a 88% level for the S&P 500 (Q2 2021). This figure has now fallen to 25% for Q3. And Stovall said that means if the bull market continues, investors should at least expect the steeper angle to rise. "The second quarter could be the best quarter in terms of percentage change in earnings growth," he said. "It will continue to be positive, just positive at a lower percentage. Traders work on the floor of the New York Stock Exchange (NYSE) on October 12, 2021.Brendan McDermid | Reuters
Another positive way to read the earnings pattern from the street: DataTrek Research still thinks analysts are too low on Q3 and Q4 results.
Apart of the slowdown in earnings growth is to be expected. The consumer discretionary sector is expected to post a decline of almost 15%, but that's because it fell a lot in 2020 after posting triple-digit gains after the Covid low: 161% in the first quarter 2021 and 210% in Q2 2021.
The best of post-Covid profit growth is uh
These kinds of earnings growth numbers "cannot be repeated," Stovall said, and that's one reason analysts don't want to be too bullish. And while negative revisions to the S&P 500 earnings outlook have hit almost every sector, especially those that had made some of Covid's biggest returns, including industrials, materials and consumer discretionary, Stovall stressed. that earnings revisionsare an indication of the situation "could be worse. Some of the sectors with the largest negative earnings revisions are still expected to show significant growth. This is just a smaller increase.
Another way to look at it: “Investors are realigning earnings estimates rather than engaging in negative earnings revisions,” Stovall said. is that we are living in an unprecedented time, we have recently seen tremendous growth in GDP, comparative growth in GDP and profits, and there is still an upward trajectory, it 's just because now we are getting past the real downturn of 2020, forward-looking estimates are going to be less and less enthusiastic. "
It comes down to what DataTrek co-founder Nick Colas is saying maybe the difference between this quarter and allIt's the other last quarters since the Covid outbreak - companies really need to provide advice.
Investors are now in the "show me " phase of profit recovery, and it's a big change, especially with the S&P year-to-date performance has been closely correlated with earnings expectations: US large-cap stocks have benefited from a tailwind throughout. the year compared to estimates that had fallen too far in the middle of Covid.
The price / earnings ratio of S&P 500
The S&P 500 price / earnings ratio has declined, from a peak in January 2021 of over 24x to around 21x, but this still represents a 28% premium over the ratio Average P / E since 2000. Valuations are a bit rich in the S&P 500 and that means companies' earnings power forecasts are higher than current expectationswill be essential for the market to rise. FactSet Research
The market is already trading at a higher P / E ratio than current expectations for next year's earnings. This means that even if analysts end up raising earnings estimates after better-than-expected numbers, stocks may not appear because they are already expected.
What is not included in the S&P 500 is what the companies are saying. 2022, their margin structure given the push and pull of inflation, the amount they have to pay for labor, and other unknowns such as impacts on home work productivity. "A whole range of conversations, that for the first quarter since Covid, we have to get into the weeds of the cost structure for companies. " Said Colas.
Actual earnings estimates for the S&P 500 do not support an assessmenttion higher than the 18x average of the last two decades and to achieve a 21x valuation, an increase in profits will be necessary. "Companies have had incredible revenue leverage over the past 12 months " said Colas. But now, for the S&P 500 to "just crawl" into its current valuation, investors will need to be convinced that there is more potential to come in 2022. This will drive the market, "he said. he said. "Valuations are rich.
This is why the message that analysts on Wall Street and recent market volatility are sending can be summed up in a way that is At the heart of this earnings season: The chapter of profit recovery, from last year 's lows, is over.
"Growth from here will be slow and choppy and prone to external shocks, so how do you put a multiple on that? This is the hard part, "said Colas.
The bullish side of the current multiple market suggests that investors still believe that profit power is persistently higher than it was before the pandemic, and that there are still 5 to 10% upward revisions. And that makes the outlook from here all the more important.
There are some fundamental things Colas is confident to say today: no one expects a recession. GDP and profits will increase. And big tech will occupy more of the S&P 500 a year from today.
But good sustainable earnings growth numbers were not a factor from the depths of Covid. They are again now, and the market isn't really going to restart unless CEOs can convince investors that the outlook is good. thing, "said Colas. " The earnings surprises were so big. ... Now it stopste. "