Earnings season in the US is coming to a close, and while it is still in full swing across the Atlantic, one thing is clear: analysts far underestimated how much of a bonanza the global economic recovery delivered in the first quarter of 2021.
The stock market? That seems to have predicted it about right.
In the US, where almost all of the S&P 500 companies have reported, this is shaping out to be the best quarter in at least a decade, with year-on-year earnings growth of more than 50 per cent. Some 87 per cent of companies that had reported by the end of last week beat estimates, the largest amount since Refinitiv began tracking the data.
While Europe’s Stoxx 600 is only about halfway done, year-over-year earnings growth is pointing to a 92.8 per cent increase, based on a blend of reported results and estimates. The rebound is stronger in Europe due to the heavy hit the continent’s economy took early last year from the pandemic. On both sides of the Atlantic, earnings are now above pre-pandemic levels.
“In the US, you had a fantastic earnings season,” said Thomas Schuessler, co-head of equities at DWS. “And why should it be any different in [Europe]? It’s a global economy.”
Analysts have been blindsided by the effect of a budding vaccination campaign, combined with easing pandemic restrictions. Before US banks kicked off the reporting season, analysts expected just 25 per cent earnings growth across companies in the S&P 500.
In Europe, consensus expectations even decreased, from 44 per cent at the end of January to 38 per cent in late February, as another wave of Covid-19 hit the continent. By the end of the first quarter, estimates still stood at 47 per cent so, as in the US, companies have delivered twice what was expected.
“The data kept improving probably week after week after week,” said Ann Miletti, head of active equity at Wells Fargo Asset Management.
The mismatch between expectations and actual results has been a feature of the pandemic, highlighting how difficult it has been for analysts and companies alike to keep up with a fast-changing situation. Wall Street failed to fully predict the economic damage in Q1 last year, when analysts underestimated the S&P 500 earnings decline by 10 percentage points.
The stock market has been largely unmoved by the torrent of good results, suggesting bullish investors had priced in a strong recovery even if more timid analysts had not plugged one into their forecasts.
Having both risen roughly 10 per cent between the start of the year and the start of earnings season, the S&P 500 and the Stoxx 600 have since traded flat.
S&P 500 companies that beat expectations outperformed the index by only 0.5 percentage points during the one-day period after reporting, less than the historic average of 1.5, according to Bank of America.
Investors have turned their focus from historic earnings to a rising number of risks on the horizon.
Top of the list: rising input costs, most notably through a rise in raw materials and shipping expenses. The word “inflation” rose from almost never coming up to being mentioned at least once per company, on average, according to Bank of America.
Executives said they would pass on what many consider temporarily higher input costs to consumers, hoping to keep profits plump. But Wall Street continues fretting, particularly over whether it will prompt the Federal Reserve to rein in monetary support sooner than expected.
“I get what people are saying when they say it’s transitory, but who cares?” asked Savita Subramanian, head of US equity and quantitative strategy at Bank of America. “Anything that violent, you kind of pay attention to it and think about positioning around it.”
Source: Economy - ft.com
