EC Earnings Growth Will Disappoint In 2021

It’s that time of year when Wall Street analysts started trotting out the predictions for earnings growth and stock market targets for the coming year. Unfortunately, each year these overly optimistic estimates are ground down as the year progresses. Next year will be no different as earnings growth will disappoint in 2021.

Setting The Bar High

Goldman Sachs hit the ground running this year by putting a 2021 price target on the S&P 500 of 4300 and 4600 by the end of 2022. If we use their “current level” of 3551, such would be a gain of 21.1% for 2021 and roughly 7% for 2022.

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Earnings Growth Disappoint 2021, #MacroView: Earnings Growth Will Disappoint In 2021

To support that growth in stock prices, you need strong earnings growth to keep expensive valuations at some “less crazy” level. To accomplish this feat, Goldman stretched reality to $175 in EPS for 2021 and $195 in 2022. (Note that Goldman used $136 in Operating (Earnings Before Reality) for 2020, which is currently $16 per share higher than S&P is presently reporting.)

Earnings Growth Disappoint 2021, #MacroView: Earnings Growth Will Disappoint In 2021

Assuming that Goldman Sachs is correct, such would put valuations on the S&P 500 of 24.57x operating earnings in 2021 and 23.59x in 2022. Such levels remain extremely expensive by any historical measure.

The Problem With Estimates

For many years, I have counseled individuals to disregard mainstream analysts, Wall Street recommendations, and even MorningStar ratings due to the inherent conflict of interest between the firms and their particular clientèle. Here is the point:

  • YOU are NOT Wall Street’s client.
  • YOU are the CONSUMER of the products sold FOR Wall Street’s clients.

Wall Street is a “big” business. I mean a massive industry of $715 Billion a year in revenue. The table below shows the annual sales of 22 of the largest financial firms in the S&P 500.

Earnings Growth Disappoint 2021, #MacroView: Earnings Growth Will Disappoint In 2021

Like all businesses, these companies are driven by increasing corporate profitability annually, regardless of market conditions. In a previous study by Lawrence Brown, Andrew Call, Michael Clement, and Nathan Sharp, you are not a Wall Street analyst’s priority. 

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

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Earnings Growth Disappoint 2021, #MacroView: Earnings Growth Will Disappoint In 2021

Where are you in order of importance, at the bottom of the list. Such is because accuracy isn’t essential – it’s only “broker votes” that matter.

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Harry Stark 1 month ago Member's comment

Well said.