An Improving Earnings Outlook To Start 2021

  • Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline -16.7% on -3.6% lower revenues in 2020 and increase +22.7% on +7.6% higher revenues in 2021. Estimates for both years have been going up. 
  • The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 28.5X and index close, as of January 5th, is $130.71, down from $156.91 in 2019. Using the same methodology, the index ‘EPS’ works out to $160.33 for 2021 (P/E of 23.2X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year. 
  • For the small-cap S&P 600 index, Q4 earnings are projected to fall -17.9% on -3.1% lower revenues. This would follow the -6.2% decline on -5.0% lower revenues in Q3.
  • For full-year 2020, the S&P 600 index is expected to experience a -29.4% decline in earnings on -10.6% lower revenues, with easy comps pushing earnings growth to +35.8% in 2021.

The overall earnings picture started improving in July, as the U.S. economy came out of the pandemic-driven slump. While pockets of entrenched weakness remain, the pace and magnitude of the recovery have largely been better than expected, even though the most recent appear to show a moderation in activity levels in response to the Fall infection surge. 

This improving trend has been showing up in positive estimate revisions, with analysts steadily raising their estimates. We saw this earlier with Q3 estimates and we are seeing the same trend in play for Q4 estimates as well, as the chart below shows.

Estimates for full-year 2021 have gone up as well, though estimates have largely remained stable lately. This could be reflective of the negative effects of surging infection rates in the country at present, which has been showing up in some of the more recent economic data as well. That said, we feel strongly that the favorable revisions trend will pick up as the vaccination exercise reaches critical mass towards the end of the first quarter.

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