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Strong Start to Q2 Earnings Season

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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 an impressive start to the Q2 earnings season, with strong momentum on the revenue side particularly notable at this admittedly early stage.


  • For the 30 S&P 500 members that have reported Q2 results already, total earnings are up +244.3% on +14.2% higher revenues, with 90% beating both EPS and revenue estimates.


  • While the outsized earnings growth pace at this early stage is mostly due to easy comparisons, primarily in the Finance sector, the performance on the revenue front (growth rate as well as beats percentage) is tracking above what we have been seeing in other recent periods.


  • For the Finance sector, now have Q2 results from 28.7% of the sector’s market capitalization in the S&P500 index. Total earnings for these Finance companies are up +322.5% from the same period last year on +0.8% higher revenues, with all the companies beating EPS estimates and 87.5% beating revenue estimates.


  • Easy comparisons and reserve releases are driving the outsized earnings growth for the Finance sector. Excluding the unusually high Finance sector earnings growth, total Q2 earnings growth for the remainder of the index members that have reported results would be up +141.3% on +23.1% higher revenues. 


  • Looking at Q2 as a whole, combining the actual results for the 30 index members that have reported with estimates for the still-to-come companies, total S&P 500 earnings are expected to be up +67.7% from the same period last year on +19.1% higher revenues, with the growth rate steadily going up as companies report better-than-expected results.


  • Given the magnitude of positive earnings surprises we are seeing at this early stage in the reporting cycle and what we saw in the preceding earnings season, we expect the final Q2 earnings growth tally to be significantly higher than the current expected +67.7%.


  • A big part of the strong Q2 earnings growth is easy comparisons to the year-earlier period that represented the bottom of the Covid-19 earnings impact. But Q2 estimates also reflect genuine growth, with total index earnings expected to be up +13.7% from the pre-Covid 2019 Q2 period.


  • Total 2021 Q2 earnings for 9 of the 16 Zacks sectors are expected to be up from the pre-Covid 2019 Q2 period, including Technology (up +32.2%), Basic Materials (+74.1%), Medical (+19.9%), Retail (+27.1%), Construction (+58.9%).


  • Sectors whose 2021 Q2 earnings are expected to remain below the comparable 2019 period include Transportation (down -62.9%), Consumer Discretionary (-48.9%), Autos (-42.3%), and Energy (-15.1%).


  • Looking at the calendar-year picture for the S&P 500 index, earnings are projected to climb +35.6% on +11.0% higher revenues in 2021 and increase +11.3% on +6.3% higher revenues in 2022. This would follow a decline of -13.1% in 2020 on -1.7% lower revenues.


  • The implied ‘EPS’ for the S&P 500 index, calculated using the current 2021 P/E of 23.7X and index close, as of July 13th, is $184.77, up from $136.22 in 2020. Using the same methodology, the index ‘EPS’ works out to $205.70 for 2022 (P/E of 21.3X). The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


Last year’s June quarter represented the peak of the pandemic’s earnings impact when S&P 500 earnings dropped -32.2% from the year-earlier period. Four of the 16 Zacks quarters – Consumer Discretionary, Autos, Energy & Transportation – actually lost money in 2020 Q2. To get a sense of these sectors’ losses in the year-earlier period, take a quick look at the 2020 Q2 results from bellwether operators in each of these sectors.

Marriott International (MAR - Free Report) , part of the Zacks Consumer Discretionary sector, lost -$0.64 per share in 2020 Q2. Similarly, General Motors (GM - Free Report) – part of the Zacks Auto sector), ExxonMobil (XOM - Free Report) – part of the Zacks Energy sector) and United Airlines (UAL - Free Report) – part of the Zacks Transportation sector) lost, on a per share basis, -$0.50, -$0.70, and -$9.31, in the year-earlier period, respectively.

In the aggregate, the Zacks Consumer Discretionary sector lost $251 million in 2020 Q2, while the Auto, Energy and Transportation sectors lost $1.2 billion, $9.6 billion and $5.3 billion, respectively.

It is this low earnings quarter that is the base period for 2021 Q2 and a major reason for the outsized +67.7% earnings growth expected in the quarter. If past is any guide, the final growth tally could be as high as +80%.

We should keep in mind, however, that easy comps aren’t the sole reason for the strong growth, as current 2021 Q2 earnings estimates represent a +13.7% growth over the comparable period in 2019. In fact, 9 of the 16 Zacks sectors are currently expected to earn more in 2021 Q2 than they did in the pre-Covid 2019 Q2 period.

The Earnings Big Picture

The chart below provides a big-picture view of earnings on a quarterly basis.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment Research
Image Source: Zacks Investment Research

We remain positive in our earnings outlook, as we see the full-year 2021 growth picture steadily improving, with the revisions trend accelerating in the back half of the year.

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