Earnings Growth Remains Strong, But P-E Ratio is Historically High

By Tom Burnett CFA
On September 17, 2021, FACTSET released its latest summary of the S/P 500 Index earnings picture. The report estimates that earnings in the September quarter will show growth of 27.6% over the 2020 third quarter. If achieved, that performance would be the largest quarterly year-over-year growth since 2010. On June 30, the estimate for third quarter earnings growth was 24.2%, so the most recent estimate is markedly higher than what analysts were forecasting in June.
For the 2021 year, the consensus earnings estimate is $201.43, which would be 43.5% higher than the 2020 performance which was greatly reduced by the Covid-19 outbreak and the measures imposed to confine it. We note that last September, the consensus figure for 2021 was just $166.20, so the much higher estimate reflects the more positive economic outlook based on the recovery from the low point in 2020. More growth is expected next year. The consensus forecast for 2022 is now $219.80, about 9% higher than the 2021 estimate.
While earnings growth is strong, the high level of the stock market continues to push the earnings multiples above the recent average levels. For example, current P-E ratio is 21.5 on 2021 forecast earnings, which is high compared to the five-year average of 18.2x and the ten-year average of 16.3x. Investors are benefitting from the low interest rate environment which may be about to change as the Federal Reserve considers its accommodative policies. No one can be sure when the Fed will move to a more restrictive policy, but it cannot continue its asset purchases and commitments to low rates indefinitely.
Tom Burnett CFA is Director of Research