In a strong bull market, sometimes it’s easy to forget that stretches of down days are normal and even healthy. Down days naturally turn market participants’ minds towards potential risks.
There are several indicators that tell a story —inflation, taxes, valuations and sentiment. Overall macroeconomic fundamentals are still providing solid support for stocks. "The earnings growth for the quarter is on pace to double—yes double the consensus 24% growth rate." - Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial.
The combination of strengthening economic growth, booming manufacturing activity, rising estimates and positive guidance could potentially lead to double-digit upside. Nearly 90% of S&P 500 constituents in the figure below have reported their numbers. S&P 500 earnings growth is tracking towards a 49% year-over-year increase.
After three quarters of significant upside (the second, third and fourth quarters of 2020), we expected analysts to catch up. Clearly, they haven’t—because the 13 percentage points of upside to fourth-quarter earnings is being followed by a 23-percentage-point upside so far for the first quarter of 2021 [Figure 2]. Keep in mind the average upside going back to 2010 is 6%. That 23 point increase is substantial.
An important barometer of results is guidance and the path of future estimates. The S&P 500’s 5.2% advance in April came as results started rolling in.
One of the reasons we were optimistic about upside coming into first-quarter earnings season was the guidance ratio. During the first quarter, 64% of S&P 500 companies that provided formal guidance moved numbers higher. For the second quarter, that number is similarly strong at 63%.
Positive guidance has pushed the consensus estimate for S&P 500 earnings per share in 2021 significantly higher—from $176 on March 31 to $187 as of May 6. Year to date, the 2021 earnings estimate has increased by $20 per share, or 12%, which is approximately what the S&P 500 Index has returned so far in 2021.
The macroeconomic environment suggests potential upside to consensus forecasts. The COVID-19 surge in some countries around the world, particularly in India introduces some risk. A pickup in inflation from upward pressures in wages, supply shortages or higher commodity prices could hamper further profit margin improvement. The same goes for potentially higher interest rates.
If you have specific questions or would like to discuss your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us at firstname.lastname@example.org to set up time to discuss further.
All index data from FactSet. This research material has been prepared by LPL Financial LLC.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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.