Corporate Earnings Poised to Hit New Record

Jul 23, 2021 | Nick Scholte


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Yes, the economic rebound has been strong. But stronger still have been the corporate results and forward guidance.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 1.0%; the U.S. Dow Jones Index up 1.1%; and the U.S. S&P 500 up 2.0%.

Switching gears from pure economic commentary, let’s take a quick look at corporate earnings and revenue this week.

As of Wednesday this week, approximately 15% of the constituent companies in the S&P 500 had reported Q2 results. Of the companies which had reported, 85% beat analyst expectations with the average company beating those earnings expectations by 20.3%. Equally impressive, the average company which has so far reported has beaten revenue estimates by 4.5%. Together, these two measures are colloquially known as the “positive surprise” index, and these are beats of near historic proportions.

Some might surmise from the preceding that these “beats” are a result of overly conservative analyst estimates under-appreciating the strength of the economic recovery, and further that these same beats are merely reflecting a rebound from the depressed levels of a year ago. Without delving into the minutiae, I’d note the first part of my previous sentence is true while the second part doesn’t really do justice to the reality that is playing out. The fact is that the previous high for quarterly earnings from all S&P 500 companies was $157 recorded in the 4th Quarter of 2019. The current quarter (i.e. Q2 2021) will see S&P 500 earnings of $169 if analyst estimates are correct. Better yet, see my first paragraph with respect to the degree to which analysts are NOT correct and actually underestimating earnings.

Still better, of the S&P 500 companies which have so far reported earnings, roughly 2/3’s have increased their forward guidance (i.e. increased the future earnings and/or revenue expectations) which, if sustained, would be the highest rate of positive guidance since 2006.

The preceding is all to say that corporations are performing as one would expect in a strong economic expansion – exceedingly well. As I have periodically written in my weekly updates since late last year, short-term market volatility (as seen on Monday of this week) should be disregarded. Absent the realistic probability of U.S. recession, corporations will continue to do well and high-quality stocks should be given the benefit of the doubt. Since no U.S. recession is in sight, portfolios remain overweight equities (i.e. stocks).

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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