By Tom Burnett CFA
The latest edition of FACTSET (January 13, 2022) spells out the analyst consensus earnings estimates for the S/P 500 Index over the next two years. The forecast for 2021 is now $205, a strong 46.4% increase from the 2020 year when the Covid-19 outbreak first occurred. The surprising performance of 2020 is that earnings only fell by 14% in 2020 from the 2019 level. This decrease could have been so much larger as the economy shut down for much of 2020, but the resilient large corporate sector enabled the S/P 500 companies to keep the earnings damage to a minimum and prepare for the recovery in 2021.
Analysts now expect this earnings growth to continue, albeit at lower rates than was accomplished in 2021. The forecast for 2022 is now $223, up some 8.7% from the 2021 level. In 2023, another gain of 8+% is forecast with a target level of $245. If achieved, that $245 level would represent a recovery of 75% above the earnings registered in 2020, a remarkable accomplishment. Investors are entitled to cast a skeptical eye on these growth forecasts since the Federal Reserve is now expected to begin raising interest rates in March or April of this year. Rising rates will slow the economy, negatively impacting corporate profits and many observers expect the consensus earnings estimates to be reduced as the Fed begins to take action.
Looking at the $223 figure expected for 2022, we see an S.P 500 Index earnings multiple of 22.3x with the Index currently trading at the 4,580 level. This multiple is high compared to the five-year average of 18.5x and the ten-year average of 16.7x. With earnings growth slowing down, investors need to keep a sharp eye on the levels of interest rates as the Fed begins to change its policy actions to a less accommodative model.
Tom Burnett CFA is Director of Research