Back to top

Image: Bigstock

A Positive Start to Q1 Earnings Season

Read MoreHide Full Article

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • We are off to a strong start to the Q1 earnings season, with growth accelerating and the outlook for the coming periods steadily improving.

 

  • Total earnings for the 26 S&P 500 companies that have reported Q1 results are up +118.5% on +9.4% higher revenues, with 80.8% beating EPS estimates and 84.6% beating revenue estimates.

 

  • For the 15.5% of the Finance sector’s market capitalization that have reported Q1 results, total earnings and revenues are up +429.6% and +24.3%, respectively, with all companies beating top- and bottom-line estimates.

 

  • Excluding the Finance sector’s strong growth, Q1 earnings growth for the remainder of the companies that have reported results would be up +0.5% (vs. +429%) on +4.4% (vs. +9.4%) higher revenues.

 

  • Looking at 2021 Q1 as a whole, total S&P 500 earnings are now expected to be up +24.1% from the same period last year on +6.0% higher revenues, with a combination of easy comparisons and strong gains in a number of sectors giving us the growth rebound.

 

  • Estimates for the current and coming quarters have steadily moved up, a trend that has been in place since last Summer. We expect this favorable revisions trend to accelerate in the coming months as we start looking past the pandemic.

 

  • The sectors with positive earnings growth in Q1 include: Finance (+74.0% earnings growth), Technology (+22.3%), Autos (+202.5%), Retail (+42.0%), Medical (+16.3%), Basic Materials (+63.5%), Construction (+37.4%), Industrial Products (+23.7%), Utilities (+3.3%), and Consumer Staples (+2.1%).

 

  • The weakest earnings growth in Q1 is expected to come from the Transportation (-181.0% earnings decline), Consumer Discretionary (-40.9%), as well as the Energy (-17.0%) sector.

 

  • For the Finance sector, Q1 earnings are expected to be up +74.0% on +4.6% higher revenues, as the group’s year-earlier results were dragged down by big loan-loss reserves at the banks as the pandemic got underway.

 

  • For the Technology sector, Q1 earnings are expected to be up +22.3% from the same period last year on +17.2% higher revenues, a clear case of strong growth and not easy comparisons.

 

  • Looking at the calendar-year picture for the S&P 500 index, earnings are projected to climb +25.6% on +8.3% higher revenues in 2021 and increase +14.4% on +6.4% higher revenues in 2022. This would follow a decline of -13.1% in 2020 on -1.8% lower revenues.

 

  • The implied ‘EPS’ for the S&P 500 index, calculated using the current 2021 P/E of 24.3X and index close, as of April 13th, is $170.77, up from $136.01 in 2020. Using the same methodology, the index ‘EPS’ works out to $195.31 for 2022 (P/E of 21.2X). The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

 

Banks Lead the Way

The big banks set aside huge sums at the start of the pandemic in anticipation of major loan losses. Fortunately for the banks, those expected loan losses didn’t materialize as the economy bounced back in response to the aggressive fiscal and monetary easing. Such reserves totaled more than $90 billion at the end of 2020 Q4 among the six largest banks – JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) , Goldman Sachs (GS - Free Report) and Morgan Stanley (MS - Free Report) .

JPMorgan released $5.2 billion of reserves in its 2021 Q1 earnings report, which came after $2.9 billion released in the preceding period. We should note that it wasn’t just reserve releases that drove the +399.1% year-over-year jump in earnings on +14.2% higher revenues at JPMorgan, as the bank benefited from blockbuster capital markets business.

Activity levels in the equity underwriting, M&A and trading was close to record levels for the seasonally weak Q1 period, which more than offset continued softness in lending demand and margin pressures. The JPMorgan and Goldman Sachs reports give us a good read-through to results from the rest of the group in the coming days.

The strong bank results were no surprise for the market, as can be seen from the group’s impressive stock market performance lately. For the stock market momentum to continue, the group will likely need to show that the core banking business will resume normal growth in the second half of the year and that the frantic pace of the capital markets business can be sustained.

Looking at the quarter as a whole for the S&P 500 index, combining the actual results that have come out with estimates for the still-to-come companies, total earnings and revenues are now expected to be up +24.1% and +6%, respectively. The chart below provides a big-picture view of earnings on a quarterly basis.

Please note that about half of the Q1 earnings growth is coming from the Finance sector. Excluding the Finance sector’s hefty contribution, Q1 earnings growth for the remainder of the index would be +13.2%.

The chart below shows the overall earnings picture on an annual basis.

We remain positive in our earnings outlook, as we see the full-year 2021 growth picture steadily improving through the first half of the year as more of the population gets vaccinated.

The Hottest Tech Mega-Trend of All

Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>