Earnings Growth Beginning To Trend Towards More Normal Level

Our positive view on the market coming out of the pandemic contraction has partially centered on earnings growth expectations. A number of factors played a part in this point of view, i.e., growth in pent-up demand, easier year-over-year data comparisons, and more. As the economic environment nears a more normal rate of growth, other variables begin to normalize as well with a critical one being earnings. And with corporate earnings, analysts' growth expectations are beginning to decline. As the second-quarter earnings reports are nearing an end, the below table shows YoY quarterly earnings growth peaking at 94.7% for Q2 for companies in the S&P 500 Index. As the quarters roll into 2022, the YoY comparisons becoming more difficult, in part due to elevated corporate earnings now due to higher demand, i.e., satisfying pent-up demand. Importantly, as the back half of 2022 earnings growth expectations show, double-digit earnings growth is expected to resume. For the calendar years, 2021, 2022, and 2023 earnings are expected to equal, $201, $220, and $236, respectively.

Quarterly earnings growth for S&P 500 Index as of August 20, 2021

One factor that can create a headwind for a particular stock and/or Index is the growth rate of earnings slowing. However, coming out of a recession like just experienced, a spike in earnings growth, then a slowing to a more reasonable rate of growth, is a mostly normal pattern as seen below. During this period of slowing, and as the economy continues to grow, historically, the equity market has continued to trend higher, all else being equal.

Earnings Growth Estimates for the S&P 500 Index as of August 23, 2021

The slowing of the earnings growth rate can be anticipated by tracking some economic variables. One, in particular, the Purchasing Mangers' Index (PMI) for Manufacturing tends to decline a month or so before earnings slow. The below chart shows the ISM PMI for Manufacturing and it has clearly trended downward from its March peak. A PMI above 50 though means manufacturing is expanding and that is the case now. Other economic variables can serve as leading indicators as well, in fact, components of the ISM PMI are incorporated in the Conference Board's Leading Economic Index.

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Disclaimer: The information and content should not be construed as a recommendation to invest or trade in any type of security. Neither the information nor any opinion expressed constitutes a ...

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