By Tom Burnett CFA
Our most recent look at earnings estimates for the S/P 500 Index is based on the FACTSET report for December 4, 2020. While the earnings estimate consensus has improved dramatically from the July estimates, fourth quarter earnings are now expected to decline by 10.1% from the year earlier period. This decline would reverse the trend of improving performance represented by the third quarter’s decline of just 5.7%. The second quarter decline of 31.6% will likely be the worst year-over-year quarterly performance in 2020. It appears that analysts have lowered their expectations for a full earnings recovery until next year. The material rise in Covid-19 related infections during the fourth quarter has persuaded the analysts to lower earnings estimates for the quarter, even though estimates for the 2021 year remain positive.
For the current year, the consensus estimate is $139.22, down some 14% from the 2019 year. Analysts now expect earnings to grow by 22% next year to $169.20. That 2021 estimate is 4.2% higher than the projection in the July 10 report. With the Index trading in the 3,700 area, the forward P-E ratio is 21.8x which is a historically high number. The low interest rate environment is a strong influence on earnings multiples, but investors should remain cognizant of the rich multiple, especially since the future earnings performance could be penalized if the Covid threat is not offset by a successful vaccination program.
Tom Burnett CFA is Director of Research