By Tom Burnett CFA
The December 2, 2021, issue of FACTSET’s Earnings Insight report reflects continued optimism among analysts projecting corporate earnings. Looking at the S/P 500 Index companies, the consensus estimate for Q4 growth is 20.9%, compared with the fourth quarter of 2020. If achieved, this result would be the fourth straight quarter of year-over-year gains of more than 20%.
Based on the latest report, the estimates for 2021 and 2022 are $205 and $222 respectively. Looking back, in the August 28, 2020 report, the consensus estimate for 2021 was just $166, but as the economy recovered sharply from the Covid-19 lockdowns, estimates were continuously raised to the current target of $205. Similarly, the estimate for 2022 is now $222, up from $218 in the August 13, 2021 report. The 2021 estimate of $205 represents an increase of more than 46% from the $140 reported in 2020.
While the earnings growth is impressive, the earnings multiples remain historically extended. With the Index at 4,690, the P-E ratio on 2022 expected earnings of $222 is more than 21x. The FACTSET report notes that the five-year average multiple is 18.4x and the ten-year average multiple is 16.6x. Investors have benefited from historically low interest rates which support the higher multiples, but most observers expect the Federal Reserve to begin a ‘tightening’ process that will combat inflation and move rates higher. If so, the currently high earnings multiples could be vulnerable to a reversion to the mean and be forced down to lower levels.
Tom Burnett CFA is Director of Research