Analysts No Longer Flying Blind Imperil Era of Big Profit Beats

(Bloomberg) -- Corporate earnings have crushed expectations like never before since the pandemic outbreak, underpinning one of the strongest bull markets ever in equities. But betting those upside surprises will continue is likely a long shot. 

So says Chris Harvey, head of equity strategy at Wells Fargo & Co., who found that about 85% of the S&P 500 companies that stopped providing financial guidance during the 2020 Covid shock have since returned to the routine. So stock analysts are no longer stumbling in the dark. 

A lack of corporate guidance, combined with a sharp economic recovery that was fueled by unprecedented stimulus, has lead to an epic run during which American firms beat analyst estimates by more than 10% for six straight quarters. With banks kicking off reporting season this week, many investors wonder whether broad earnings will continue to produce huge upside surprises that would prompt analysts to ratchet up their numbers as furiously as they did last year. 

Over the course of 2021, estimated profits for S&P 500 firms jumped 24% to $203.10 a share for that year, data compiled by Bloomberg Intelligence show.

“Last year’s EPS revision pace is unlikely to repeat,” Harvey wrote in a note to clients Wednesday. “Markets have already arb-ed out much of the pandemic-induced inefficiencies (i.e., lack of guidance), so the low-hanging fruit has been picked. Now, revisions will likely be driven mainly by improving fundamentals.” 

Like many other things during the pandemic, earnings were extremely hard to predict and the surprises were legion. For context, during the five years prior to the crisis, companies beat profit estimates by an average 3%.

The ability of corporate America to navigate headwinds from supply-chain bottlenecks to commodity inflation and still deliver robust results has been impressive. And that resilience is the backbone of the equity rally that’s caused the S&P 500 to more than double since March 2020.

In 2021, the earnings expansion offset a contraction in price-earnings multiples, contributing to the S&P 500’s returns more than any year since at least 1986, according to data compiled by Cornerstone Macro strategist Michael Kantrowitz.

With the Federal Reserve now embarking on a tightening cycle, earnings are likely all the market can count on to sustain its uptrend, given that higher rates add pressure on equity valuations. And yet the pace of upward revisions is likely to lose steam not only because of increased clarity from guidance but also a maturing economy means weaker growth momentum. 

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