By Tom Burnett CFA
As investors sift through the early 2021 first quarter earnings reports, the positive momentum off the dismal 2020 results remains the prominent trend. According to the FACTSET report for April 30, 2021, analysts are continuing to raise their S/P 500 Index earnings forecasts for this year and for 2022. The latest consensus forecast sees 2021 at $185, up 32% from the actual 2020 figure of $140. In addition, the consensus projection for next year is growth of 11.8% to $207. If the forecasts hold up, they would represent record high annual earnings for the Index.
It is important to note that last September, as the economy was beginning to pull out of the Covid-related slowdown, the forecast for 2021 earnings was $166. The current estimate of $185 is 11.4% higher than the September forecast. Clearly, the analyst community is being positively influenced by the earnings performance that has been thus far reported.
Investors can take comfort from this expected earnings growth, but there is always a danger that the market optimism overshoots the true value of the earnings performance. For example, the S/P Index now trades at 22.3x the estimated earnings for 2021. According to FACTSET, the average earnings multiple over five years is 17.9x and the average multiple over 10 years is 16.0x. Investors must be prudent in deciding what to pay for this positive earnings recovery since the current market multiples exceed the recent historical average multiples.
Tom Burnett CFA is Director of Research