By Tom Burnett CFA
The latest (April 1, 2021) FACTSET Report on consensus earnings estimates for the S/P 500 Index companies reflects growing optimism over expectations for 2021 and 2022. The Index earnings fell 14% in 2020 to $140, as the COVID-19 outbreak depressed economic activity globally. In the U.S. economy, more than 26 million workers lost their jobs and consumer spending took a dramatic dive. The overall economy as measured by GDP, fell by 3.5% from the 2019 level. Analysts now expect the recovery which began in the third quarter of 2020 to continue showing resilience and expansion. With Covid cases leveling off and vaccinations growing, most observers expect strong corporate earnings performance.
The latest Report carries an earnings estimate of $175 for 2021. If achieved, that result would equate to a gain of 25.0% from 2020. In its November 6, 2020, Report, FACTSET used an estimate of $168 for 2021. The optimistic take is continued in the estimate of $202 for the 2022 year. The 2022 estimate is 15.4% above the 2021 forecast.
As we approach the first quarter earnings announcements, investors need to reflect on the bullish expectations from the analyst community. A 25% earnings gain estimate could lead to disappointing market actions if the actual results do not come through. Going back over the annual changes in S/P 500 Index earnings for the past decade, we do see a 21.1% gain in 2018, so a 25% annual gain is not unreasonable. Disappointing results, however, are always possible and investors will need to keep a sharp eye on the first quarter results which will begin to be announced next week.
It is also important to note that the price-earnings ratio on 2021 earnings has expanded to the 22x level. According to the latest FACTSET Report, the five-year average multiple is 17.8x and the ten-year average is 15.9x, so the current market environment has priced high expectations into the S/P 500 Index trading levels.
Tom Burnett CFA is Director of Research