Timely and Relevant News: Here Comes The Earnings Boom

Fourth-quarter earnings season is in the home stretch and it’s been a good one. Based on what we've learned from corporate America in the past three weeks, earnings could continue to rebound strong in 2021.

Outstanding Numbers in the Fourth Quarter

Coming into fourth-quarter earnings season, investors had plenty of reasons to expect that companies would deliver better-than-expected results. The US economy grew at a solid 4% annualized pace in the fourth quarter (source: Bureau of Economic Analysis GDP data). Strong manufacturing surveys signaled better earnings ahead. Analysts’ earnings estimates rose during the quarter, as companies issuing fourth-quarter guidance mostly raised expectations.

Now that most numbers are pretty much in the books (93% of S&P 500 companies have reported results), it’s clear that optimism was warranted as earnings impressively grew during the quarter [Figure 1].

Here are the impressive numbers:

Fourth-quarter earnings growth for the S&P 500 is tracking to 3.5%, more than 12 percentage points above the consensus estimate at quarter-end (December 31, 2020).
A near-record 79% of S&P 500 companies have exceeded earnings estimates, above the five-year average of 74%.
Five sectors grew their earnings by double-digits: communication services, financials, healthcare, materials, and information technology.
Sales for S&P 500 companies in aggregate impressively rose more than 3% year over year.
During earnings season, the consensus earnings estimate for the next 12 months rose 4%, compared with the average 2-3% reduction historically.

These results were particularly impressive given the wave of COVID-19 that brought some new targeted restrictions late last year.

Bar Raised Again

Not only did corporate America deliver big upside to estimates—but their outlooks for 2021 were positive enough to drive a sizable increase in estimates. As shown in Figure 2, since the start of fourth quarter on October 1, 2020, estimates for 2020 and 2021 have increased significantly.

These increases in estimates may be a sign of better earnings ahead. The economic recovery has continued to surpass expectations. More stimulus—a lot more—is likely coming soon, which could drive US GDP growth above our forecast of 5—5.5%.

We see two risks to 2021 earnings. First, earnings tend to fall short of the consensus estimate in most years, though this year may be different given the unique circumstances. Second, COVID-19 still carries risks and we’d like to see further progress toward ending the pandemic. We do see upside if all goes according to plan.

Reiterating Positive Stock Market Outlook

Our confidence in the economic recovery continues to grow, bolstered by vaccine distribution, and fiscal and monetary stimulus. We anticipate a strong earnings rebound will enable stocks to grow into their elevated valuations, even if interest rates move a bit higher from here. Markets may still be underestimating the potential for pent-up demand to drive a sharp rebound in activity during the spring and summer as the economy fully reopens. So while a pickup in volatility would be normal at this stage of a strong bull market, we think suitable investors may want to consider "buy the dip" opportunities as they arise.

If you have questions about your investments or have other financial planning needs, we encourage you to Contact Us to speak with your financial advisor.

Disclosures:

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

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The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

All index data from FactSet.

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