Corporate profits

Corporate profits hit record highs, but earnings expectations may still be too low

Expectations for the corporate earnings season starting in the coming week have already risen by a record amount, but that may not be enough.

After earnings for companies in the S&P 500 SPX index,
-1.19%
jumped 52% to a record high in the first quarter of 2021, analysts raised their estimates for the next 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 senior earnings analyst John Butters.

It would be the first time that corporate profits have grown more than 50% year-on-year since the United States emerged from the last recession, in the fourth quarter of 2009 and the first quarter of 2010, according to Dow Jones Market Data . If expectations are met, corporate profits would also hit a record high for the first half of the year.

Still, expectations of record earnings and huge growth may not be enough to capture what is about to happen.

“Analysts have beaten second quarter estimates to a record high, and they’re still too low. The market knows it, ”wrote Nicholas Colas, co-founder of DataTrek Research, in a note. “This results season must be good, much better than expected.”

Colas pointed out that estimates still predict a sequential decline in aggregate earnings for the S&P 500 in the second quarter, to $ 45.03 per share from $ 49.06 per share in the first quarter. This would go against the established history, which shows earnings overall increased from Q1 to Q2.

Investors seem to know it, with the S&P 500 index rising 15.6% year-to-date last week, while analysts’ earnings revision rose 14% for the second quarter and 8, 7% for the whole year, noted Colas.

“This tells us that the market is experiencing a version of the bullish scenario that we presented: that the street numbers are way too low,” he wrote.

Butters suggested Friday that profits would exceed, writing “Based on the five-year average improvement in profit growth over each profit season due to companies reporting positive earnings surprises, it is likely the index will show earnings growth equal to or greater than 69% for the second quarter. “

Other analysts agree that a greater pace could be ahead.

“We believe EPS will rise 75% on strong earnings from financials and cyclicals,” wrote Jonathan Golub, chief US equity strategist at Credit Suisse. “Stocks rallied with higher EPS expectations as multiples remained largely unchanged.”

Many analysts believe the second quarter will be the peak of the current surge in corporate profits, but don’t seem concerned about a market downturn.

“What we’ve seen in past market cycles is that once you get past the peak of year-over-year growth, you see multiples start showing up a bit,” Matt Stucky , senior portfolio manager for equities at Northwestern Mutual Wealth Management told MarketWatch. “This is a sign that you are more in the middle of the cycle, but it is not necessarily a reason to be underweight stocks or be afraid of the stock market, you can still have very good returns on the stock market when you are. sort of in this middle part of a market cycle.

“Market participants are keenly aware that the level of growth can only occur for a very short period of time,” wrote Scott Wren, senior global market strategist at Wells Fargo, in a note.

“We don’t think the markets are worried about slowing economic growth or earnings from these very robust levels, at least at this point,” he concluded.

The number (s) to watch: Net interest income and bank margins. The financial sector was one of the big winners in the surge in profits, with industry profits more than doubling in the first quarter and are expected to do so again in the second quarter.

Yet, as MarketWatch’s Philip van Doorn recently pointed out, bank stocks have lagged behind the larger market. One of the reasons he puts forward is the lower yield on 10-year US Treasury bills TMUBMUSD10Y,
1.496%
last month, which could weigh on banks’ credit margins.

Bank Profits Snapshot: Here’s Your Chance to Buy Bank Stocks Before Rising Interest Rates Raise Profits

The big banks will be headliners for the coming week’s results, and their forward-looking numbers and comments on the effects of a sustained fall in long-term interest rates will form the bulk of their reports.

Put this call on your calendar: Delta Air Lines Inc.
DAL,
-1.73%
The airline industry has obviously been hampered by the COVID-19 pandemic, but it looks like a recovery has started. However, the numbers Delta shares on Wednesday will likely be secondary to what executives say on their conference call about the long-term rebound, which could also affect other shares of airlines that report profits later in. the season.

“We believe that the focus of investors is not on actual results, or even the short term
advice, but rather any commentary on post-Labor Day trends, ”MKM executive director Conor Cunningham wrote in an overview of the Delta report. “Investors are clearly comfortable with the return to leisure, but are now looking for the next step.”

This week in earnings

Dow Jones Industrial Average
DJIA,
-1.59%
reports: JP Morgan Chase & Co. JPM,
-1.36%
and Goldman Sachs Group Inc. GS,
-1.78%
(Tuesday); UnitedHealth Group Inc. UNH,
-2.42%
(Thusday); Honeywell Intl Inc. HON,
-1.23%
(Friday)

S&P 500 Reports

Tuesday: Conagra Brands Inc. CAG,
-2.28%,
Fastenal Co. FAST,
-2.29%,
First Republic Bank FRC,
-1.00%,
Goldman Sachs, JP Morgan, PepsiCo. Inc. PEP,
-1.24%

Wednesday: Bank of America Corp. BAC,
-1.44%,
BlackRock Inc. BLK,
-2.09%,
Citigroup Inc. C,
-1.89%,
Delta, PNC Financial Services Group Inc. PNC,
-0.91%,
Wells Fargo & Co. WFC,
-1.32%

Thursday: Bank of New York Mellon Corp. BK,
-1.50%,
Cintas Corp. CTAS,
-2.21%,
Morgan Stanley MS,
-2.25%,
People’s United Financial Inc. PBCT,
-2.35%,
Progressive Corp. PGR,
-0.82%,
Truist Financial Corp. TFC,
-1.30%,
UnitedHealth, US Bancorp USB,
-1.36%

Friday: Charles Schwab Corp. SCHW,
-3.37%,
Honeywell, Kansas City South KSU,
-0.90%,
NVR Inc. NVR,
-3.00%,
State Street Corp. STT,
-1.45%,
VF Corp. VFC,
-2.26%


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