By Tom Burnett CFA
The most recent (January 15, 2021) FACTSET report on earnings forecasts for the S/P 500 Index reflects growing analysts’ optimism over 2021 and 2022 prospects. The consensus outlook for the 2020 fourth quarter is a decline of 6.8% from the year-earlier quarter. This decline shows a distinct improvement from the 7.5% decline in the third quarter and the immense 31.6% decline in the June quarter. The negative impact on earnings and the general economy from the Covid-19 outbreak was most severely experienced in the June quarter. For the 2021 year, the earnings estimate is now $168.30, up 22.6% from the 2020 estimate. The 2020 figure of $137.31 equates to a decline of 15.9% from 2019 earnings level. The 2021 estimate is now 5.1% higher than it was in the July 10, 2020 FACTSET report.
If the $168.3 figure is achieved in 2021, it will mark a 4% improvement from the 2019 level, the last full year prior to the negative Covid-19 impact. Earnings momentum is now expected to continue into 2022 when the forecast figure is a record $196.10. That figure would represent growth of 16.6% from the expected 2021 level.
In summary, the analyst community is looking for earnings growth of 22.6% this year with an additional growth of 16.6% in 2022. The forward P-E ratio on expected 2021 earnings is over 22x, well above the five-year average of 17.5x and the ten-year average of 15.7x. The positive impact of record low interest rates helps to explain the aggressive multiples, but investors need to watch carefully for any negative earnings surprises that would elevate the earnings multiples to even higher levels.
Tom Burnett CFA is Director of Research