S&P 500 21Q1 Earnings Preview: Expectations Continue To Rise

In 2021, we expect to see a year of high expectations for earnings growth as we exit 2020, which saw growth rates plummet during the first three quarters to levels not seen since the 2008 crisis. The earnings growth forecast for 2021 is currently 25.9%, the highest since 2010.

In a typical quarter, year-over-year (YoY) growth expectations decline by an average of 3.5 percentage points (ppts) from the start of the quarter to the start of earnings season. Seeing an increase in growth expectations heading into earnings season is fairly uncommon, but we have seen exactly this behavior for the third consecutive quarter. It is worth paying attention when it happens because it can be a signal of things to come as the quarter plays out.

20Q3 and 20Q4 earnings growth improved 1.7 and 1.5 ppts respectively from the start of the quarter to the start of earnings season. By the end of the earnings season quarter, we saw earnings growth improve by 15.0 and 14.1 ppts respectively. These increases were some of the largest on record since Refinitiv has tracked this data.

We mention this as 21Q1 has seen an even larger improvement in earnings growth from the start of the quarter to the start of the earnings season. 21Q1 earnings growth has improved from 19.8% to 24.2% over this period, resulting in a 4.4 percentage point increase. As shown in Exhibit 1, this is the largest gain since 2010Q2 and the fifth-largest gain since 2002.

Exhibit 1: S&P 500 Growth Rate Change Heading Into Earnings Season

How high can we go?

This raises the question as to whether we will see similar improvements in the 21Q1 earnings growth when the dust settles. To help frame perspective around this, we can look at the earnings surprise factor. Over the past four quarters (20Q1-20Q4), the average earnings surprise factor has been 15.2%, well above the long-term surprise factor (since 1994) of 3.7%.

If we assume this trend will continue in 21Q1 and apply the prior four-quarter average surprise factor of 15.2% to the companies yet to report, we could potentially see 21Q1 earnings growth improve to 42.4% by the end of earnings season.

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