Earnings Growth Gets Much More Difficult From Here

By: Wayne Duggan

Second-quarter earnings season is winding down, and S&P 500 companies have put up some extremely impressive earnings growth numbers. Unfortunately, earnings growth will likely start getting much more difficult starting in the 2nd half of the year.

The Numbers
In the 2nd quarter, S&P 500 companies have reported 89.3% year-over-year earnings growth so far. That growth rate represents the highest earnings growth in a single quarter since the 4th quarter of 2009.

Of course, any investor who hasn’t been hiding under a rock in the past 2 years understands there’s a good reason for that extreme growth rate. In the 4th quarter of 2009, companies were lapping the same period of 2008, during which the financial crisis ravaged the economy. This year presents a similar situation. Earnings growth in the 2nd quarter this year was exceptional in large part because the economy was in a pandemic lockdown in the 2nd quarter of 2020.

Still, 2nd-quarter earnings numbers were much better than analysts expected. In fact, 87% of S&P 500 companies have reported earnings that beat consensus analyst estimates. Since the pandemic began in the 2nd quarter of 2020, S&P 500 companies have beaten analyst earnings estimates by an average of 19%. That number represents far more surprise upside than the 2% earnings beat S&P 500 companies averaged from 2000 through 2019.

Earnings Party Ending?
The easing of lockdowns and restrictions began in the 2nd half of 2020 and really started to ramp up in the 1st quarter of 2021. For investors, that means that near 90% earnings growth is likely an unreasonable expectation in the 2nd half of the year. In addition, inflation and labor shortages have begun eating into margins and profitability.

In the 2nd quarter, S&P 500 earnings per share were up 27% compared to pre-pandemic 2019 levels. Looking ahead, analysts are calling for that 2-year growth rate to drop to 17% in the 3rd quarter before bouncing back to 22% in the 4th quarter.

For the full year, analysts are now expecting S&P 500 earnings per share (EPS) of $201.19, up 44% year-over-year and 26.2% from 2019. Looking ahead to 2022, analysts are expecting just 9% year-over-year EPS growth.

More Risks Ahead
While 9% growth isn’t particularly bad, there are plenty of risks out there that could drop that earnings growth rate even further. Bank of America estimates every 0.1% rise in hourly wages decreases S&P 500 profit margins by 0.04%. An end to stimulus payments and the federal eviction ban could also weaken consumer sentiment. But perhaps the biggest threat to S&P 500 earnings in the quarters ahead is a potential tax hike. U.S. President Joe Biden has said he intends to raise corporate taxes from 21% to 28%. Bank of America economists estimate a tax hike could cut 5% off S&P 500 earnings in 2022.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or to open an account.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

The IPOX® Week, September 20th, 2021
Read More
Understanding the Basics of Option Pricing
Read More
4 Tips for Maximizing Trading Returns
Read More
The IPOX® Week, September 13th, 2021
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.

OK