Corporations Report Strong Earnings Growth in the First Half of 2021

By Tom Burnett CFA
According to the FACTSET report for August 13, 2021, more than 90% of the S/P 500 Index companies have reported first half results for the 2021 year. Based on the reports published thus far, FACTSET estimates that the S/P 500 companies will achieve year-over-year earnings growth of 89% in the second quarter. That rate of earnings growth would be the largest since the fourth quarter of 2009 when the economy was recovering from the Great Recession. The S/P 500 Index is now expected to report earnings of $201 for the 2021 year. That $201 level represents a gain of 43% from the Covid-ravaged level of $140 earned in 2020. Analysts have been raising their collective 2021 estimates since last September when the projection for 2021 was just $166. The latest estimate of $201 is 21% higher than the September 2020 estimate for the 2021 year. The consensus estimate for the 2022 year is now $219, some 9% higher than the expected 2021 level.
The stock market has certainly taken notice of the robust earnings performance achieved and disclosed in 2021. With the Index trading around the 4,400 level, the price-earnings ratio on expected 2021 earnings is now 22x. According to FACTSET, the five-year average for this P-E ratio is 18.2x and the ten-year average is 16.3x. If earnings continue to grow, the P-E ratio may decline, but it is still over 20.0x on expected 2022 earnings, well above the five and ten averages for this ratio. The elevated market P-E ratios are supported by the historically low interest rate environment, but many observers expect the Federal Reserve to enact policies that will raise rates next year, so investors must watch closely for any interest rate changes that could put pressure on today’s historically high P-E ratios.
Tom Burnett CFA is Director of Research