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We are off to a great start in the Q1 earnings season, with the big banks coming out with a much stronger profitability picture relative to what they were able to show in the preceding periods. This reconfirms our bullish earnings outlook that envisions estimates going up significantly over the coming months as the full extent of the economic rebound gets clearer.

The positive bank results aren’t just reflective of business conditions in the first quarter of 2021, but rather a function of growing optimism about the coming quarters, notwithstanding the still unsettled Covid situation in major parts of the world outside the U.S.

The big banks released billions in loan loss reserves that they had set aside at the start of the pandemic to cover loans going bad as a result of Covid-related stresses. Needless to say, many of those negative scenarios didn’t come to fruition, thanks to aggressive fiscal and monetary measures.

In effect, these banks are saying, through these reserve releases, that they expect economic conditions in the coming quarters to be stronger relative to what they had originally modeled. This creates a favorable read-through for all sectors, particularly the economically sensitive ones.

The unusually high year-over-year growth rates for bank earnings are primarily a function of easy comparisons and the aforementioned reserve releases. But that’s not to suggest that there wasn’t genuine strength in the quarterly numbers, as the group’s capital markets business was off-the-charts good. Trading volumes, equity underwriting, and M&A activities were very strong during the period, more than offsetting continued weakness in the core banking business with soft lending and margin issues.

The margin picture is on track to improve markedly in the coming quarters as the yield curve has steepened, though the outlook for lending demand still remains uncertain. The hope is that loan demand should improve in the second half of the year as the recovery takes hold and the pandemic loses its bite.

The market’s lukewarm reaction to these bank results is solely a function of how strong these stocks have been this year.

The Q1 reporting cycle accelerates meaningfully this week, with more than 250 companies on deck to report, including 75 S&P 500 members. This week’s reporting docket is dominated by banks and brokers, but we do have a number of bellwethers like Netflix (NFLX - Free Report), Proctor & Gamble (PG - Free Report), IBM (IBM - Free Report), CSX Corp. (CSX - Free Report) and others. With results from 44 S&P 500 members out already, we will have seen Q1 numbers from more than a fifth of the index’s total membership by the end of this week.

Q1 Earnings Season Scorecard

We now have Q1 results from 44 S&P 500 members or 8.8% of the index’s total membership. Total earnings (or aggregate net income) for these 44 companies are up +93.3% from the same period last year on +7.7% lower revenues, with 81.8% beating EPS and revenue estimates.

The two sets of comparison charts below put the Q1 results from these 44 index members in a historical context, which should give us a sense of how the Q4 earnings season is tracking at this stage relative to other recent periods.

The first set of comparison charts compare the earnings and revenue growth rates for these 44 index members.

The growth comparison is likely not fair, given the unusually high year-over-year growth rates in the Finance sector, a function of big reserve releases, and easy comparisons in 2021 Q1.

The Finance sector is such a big factor in the earnings growth rate for the 44 index members that have reported at this stage that on an ex-Finance basis, the Q1 earnings growth for the remaining companies that have reported drops to only +0.1%. But even on an ex-Finance basis, the Q1 earnings growth rate still compares favorably to other recent periods, as the chart below shows.

The second set of charts compare the proportion of these 44 index members beating EPS and revenue estimates.

For the Finance sector, we now have Q1 results from 40.7% of the sector’s total market capitalization in the S&P 500 index and a big part of the remainder will report results this week. Total earnings for these Finance companies are up +174.5% from the same period last year on +14.1% higher revenues, with 93.8% beating EPS estimates and 81.3% beating revenue estimates.

This is a significantly better performance than we have seen from these banks in recent quarters.

Overall Expectations for 2021 Q1

Looking at Q1 as a whole, combining the actual results that have come out with estimates for the still to come companies, total earnings for the S&P 500 index are expected to up +27.1% on +6.2% higher revenues.

Part of the strong growth in Q1 is reflective of easy comparisons, as the last month of 2020 Q1 was weighed down by the pandemic, though the full impact showed up in Q2. Those easy comparisons are notable for the Finance, Consumer Discretionary, Transportation and Energy sectors. Profitability in these sectors is notably above the Covid-hit levels of the year-earlier period, but they are still below the comparable period in 2019 (2019 Q1), except for the Finance sector.

But it isn’t just easy comparisons that is giving us the strong aggregate growth in 2021 Q1. A number of sectors, including the all-important Technology sector, are on track to produce genuine growth, i.e., 2021 Q1 profitability growth above pre-Covid levels. These include, in addition to Technology, Construction, Medical, Basic Materials, Consumer Staples, and Utilities.

The Finance sector is benefiting from easy comparisons to the year-earlier period, but 2021 Q1 earnings are now expected to be +28.1% above the 2019 Q1 level.

The table below shows summary expectations for 2021 Q1, contrasted with what was actually achieved in 2020 Q4.

The chart below takes a big-picture view of the quarters, showing Q1 earnings and revenue growth highlighted and shown in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.

The chart below shows quarterly earnings totals or quarterly aggregate net income, instead of year-over-year growth rates. This gives us a better appreciation of the pandemic’s earnings imapct and the resulting easy comparisons that are helping the growth rate in Q1 (and hugely in Q2).

The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +25.7% and +8.3%, respectively, which follows the Covid-driven decline of -13.1% in 2020.

On an index ‘EPS’ basis, the 2021 expectation works out to $171.02, up from $136.10 per ‘Index share’ in 2020.

These full-year estimates have been going up as well, as the chart below shows.

We envision this favorable revision trend to accelerate over the next few months as the vaccination effort reaches a critical mass and greater ‘normalcy’ returns to life.