Corporate Earnings Growth Strong, But P-E Ratios Remain Historically High

By Tom Burnett CFA
According to the September 3, 2021, issue of the FACTSET earnings report, the second quarter earnings growth for the S/P 500 Index companies exceeded 90.9%, compared to the earnings for the second quarter of 2020. Last year’s second quarter formed a low base, however, as the Covid-19 outbreak led to economic lockdowns and forced closings. The strong second quarter results for the Index mark the highest year-over-year growth since the fourth quarter of 2009. The analyst consensus estimate for the Index in 2021 is now for earnings to reach $201.48, up more than 43% from the Covid -ravaged results in 2020. Growth of another 9.5% is expected for the 2022 year. Last September, the estimate for 2021 was just $166.30, so the analysts have raised their views for 2021 earnings by 21% over the past year.
This strong earnings performance has not gone unnoticed by market participants. Based on the 4,520 level for the S/P Index, the multiple on 2021 earnings is now above 22x, an aggressive earnings multiple. According to the FACTSET report, the five-year average P-E ratio is 18.2x and the ten-year ratio is 16.3x. The low interest rate environment has helped the stock market trade at recent historically high multiples, but many observers expect the Federal Reserve to begin to cut back its accommodative activities which could, over time, lead to higher rates and lower price-earnings ratios.
Tom Burnett CFA is Director of Research