S&P 500 Profit Recession May End as Companies Trounce Estimates
(Bloomberg) -- For bulls anxious that stretched valuations in U.S. stocks could imperil the current rally, the earnings season that picks up in earnest on Friday may offer a tonic.
While profits from S&P 500 companies are projected to drop for a fourth straight quarter in the final period of 2020, the dozen companies that have already reported have trounced estimates to such an extent that the fourth-quarter tally is on track to exceed the per-share figure from the same period in 2019.
That would halt a streak of contracting profits that reached two quarters as pandemic-fueled restrictions devastated large parts of Corporate America. Big companies rushed to cut costs and cater to stay-at-home demand amid the virus outbreak, increasing online business.
A swift recovery in profits would validate bulls who have looked past surging virus cases to bet on an economic rebound amid vaccine rollout and government stimulus. Up 70% from the bear-market trough in March, the S&P 500 is trading at 23 times forecast earnings, close to the highest multiples since the dot-com era.
“Wall Street expectations are too low for Q4 2020, so we should see plenty of beats. We need them,” Nick Colas, co-founder of DataTrek Research, wrote in a note this week. With current estimates pointing to a sequential profit decline in the fourth quarter, a period that typically gets a lift from holiday spending, the bar is likely set too low, making it easier for companies to deliver outsize beats, he added.
S&P 500 companies managed to exceed analysts’ estimates by an average 21% in the previous two quarters but still saw profits trail the year-earlier period. So far, those that have released results this season have topped expectations by 14%.
Should the pace of positive surprises continue, the S&P 500’s per-share profits -- which according to analyst estimates compiled by Bloomberg Intelligence fell by 8.5% to $37.13 -- would end up between $42.33 and $44.92. That would eclipse the $42.01 that companies earned in the final quarter of 2019.
Better-than-estimated results are likely to set the stage for expectations to improve for this year and next, potentially making the S&P 500 look less expensive. Right now, analysts forecast the index’s profits to jump 23% this year, followed by another 17% increase in 2022.
©2021 Bloomberg L.P.