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Can Earnings Growth Be Sustained?

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The Q1 earnings season turned out to be everything that the market was looking for, and then some.

Companies easily beat top- and bottom-line estimates that had gone up ahead of the start of the reporting cycle, unlike in the past when estimates would go down before earnings releases. Importantly, the tone and substance of management guidance and qualitative commentary has been very favorable, which is helping sustain the positive revisions trend for the current and coming periods.

For the 425 S&P 500 members that have reported Q1 results already, total earnings and revenues are up +47% and +10.3%, respectively. The proportion of these 425 index members beating EPS and revenue estimates is a very high 85.9% and 76.7%, respectively.

The very high earnings growth rate is not solely a result of easy comparisons to the year-earlier period, but rather reflective of genuine growth across a number of major sectors, including the Technology sector.

We saw that the ‘Big 5’ Tech companies – Amazon (AMZN - Free Report) , Apple (AAPL - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , and Facebook (FB - Free Report) – collectively enjoyed year-over-year growth rates of +104% in earnings on +41.5% in revenues.

We know that these unusually high growth rates would come down as we move through the remainder of the year, as comparisons will increasingly get tougher for these and other companies. That said, the aggregate earnings tally for Q1 is on track to reach an all-time quarterly record, as the chart below shows.

You can see in this chart that the 2021 Q1 record will get eclipsed by the last quarter of the year. In fact, it is very likely that even the Q3 tally will get revised higher than what we are seeing for Q1.

The fact that Q1 earnings are on track to reach an all-time record even though significant parts of the economy are still weighed down by Covid is an impressive achievement. The sectors still dealing with the pandemic’s effects include the Transportation sector (particularly air carriers) and the Consumer Discretionary sector that includes the leisure and hospitality businesses.

For more details about the Q1 earnings season and evolving expectations for the coming periods, please check out our weekly Earnings Trends report >>>> A Positive Earnings Backdrop