Stocktake: Analysts expect big earnings rebound

Earnings season in the United States kicks off in earnest this week, with Bank of America, Citigroup, Pepsico, Blackrock and Delta Airlines just some of the names set to report.

Expectations are high, with year-on-year S&P 500 earnings projected to grow 24 per cent. Analyst estimates rose by 6 per cent during the first quarter alone.

That may sound unexceptional, but it represents a striking departure from the norm. Usually, estimates decrease during a quarter; over the past 10 years, estimates have fallen by an average of 4.2 per cent during a quarter, according to FactSet. The recent rise in estimates marks the largest quarterly increase since the firm began tracking earnings data 19 years ago.

The only comparable period was in early 2018, when corporate tax cuts forced analysts to revise higher their forecasts.

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What are the driving factors? Firstly, FactSet says analysts were too aggressive when slashing estimates during the panic-ridden first half of 2020. More recently, increased economic growth expectations as well as rising commodity prices and interest rates have been contributory factors.

Finally, corporations have become more optimistic of late. Some 61 companies issued positive guidance in the first quarter – well above the average (35) and the highest number since FactSet began tracking this data in 2006.

Still, a lot of good news is already reflected in prices. Stocks trade on 21.9 estimated earnings, well above their five-year (17.8) and 10-year (15.9) averages. Consequently, any companies that fall short may be greeted by an unforgiving market reaction.