Talking Tactics

Chart Chat - A strong earnings season to start the year

The current US earnings season has seen many companies better expectations but does this bode well for share prices from here? We assess whether some investors are too bullish and argue the case for focusing on fundamentals and thinking long term.
February 2021

Robert Plant

Director, Portfolio Manager, Multi Asset Solutions

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Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Over two thirds through the current US earnings season, and companies have delivered strong results, beating expectations. If the current ‘beat rate’ is maintained, fourth quarter year-on-year earnings growth will be positive. 80% of companies have beaten so far. The main positive that the chart shows, is that fourth quarter actual earnings growth has turned positive – for the first time since the start of the pandemic. The breadth and size of the beats is near record levels in the US, following on from outsized beats in the previous two quarters.

Source is: Bloomberg, BMO Global Asset Management, 22-Feb-21.

Who are the winners?

Financials have recorded the strongest beats so far, with banks posting broad based revenue upside and lower than expected loan loss provisions. Technology, Consumer Discretionary and Materials sectors have also seen robust earnings growth. The S&P 500 outperformance has been driven primarily by mega-cap technology names. Several pandemic-hit groups, such as the Energy sector, delivered outsized losses.

How does this compare historically?

Historically, consensus earnings per share (EPS) growth projections are typically downgraded through the year – for the S&P 500, the average downgrade has been 7% since 1985.

Previous ‘recovery years’, which are those that followed sharp EPS falls, such as 2003 and 2009-2010, saw very strong earnings growth where consensus projections ended up being revised higher – contrary to the normal pattern of earnings revisions.

What does this tell us?

Well, it could be argued that the consensus view on earnings for this year is particularly bullish – a warning sign for some; however, the base effects are favourable and the economic data points to improvements ahead. So, we can have genuine optimism for the health of companies in 2021 – and this is not just true for the US.There has been positive growth across most major markets, especially so for emerging markets, and excluding Europe, although there has been improvement. Positive earnings growth equals positive share price growth, right? Well not quite as markets are not rational, and simple equating of the two could cause investors problems; equity markets could get ahead of the fundamentals and reach exuberance levels, or ignore the positive fundamentals altogether and dive on any negative headlines.

What we think this chart tells us is that there are positive company fundamentals out there, and that doing the research and investing for the longer term makes sense.

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

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