By Tom Burnett CFA
According to the July 30, 2021 FACTSET report on S/P 500 composite earnings announcements, the second quarter is setting up to be the strongest performance since the fourth quarter of 2009. Based on the reports published so far, it now appears that the second quarter operating results will come in around 85% higher than the earnings performance of the 2020 second quarter. The weak results in 2020 were caused by the Covid-10 outbreak and the measures imposed on the economy to halt the spread of the virus. The results in the second quarter of 2020 were the worst of any of the four 2020 quarters. Clearly, corporate performance has bounced strongly from the weak performance of one year ago.
The FACTSET consensus now sees 2021 S/P 500 Index earning of $199, up 42% from the virus-weakened earnings level in 2020. We note that last September, the FACTSET consensus forecast for 2021 earnings was just $166, so the forecasts have been upgraded by almost 20% since then. All eleven industry groups are expected to show positive earnings performance in the 2021 year. The optimistic view continues into 2022 when the earnings are expected to reach $217, some 9.0% higher than the $199 forecast for this year.
With the Index trading in the 4,420 area, the p-e ratio on 2021 earnings is 22.1x, a multiple that is well above recent historical levels. For example, the FACTSET 5-year average earnings multiple is 18.1x and the ten-year average is 16.2x. Historically low interest rates account for some of the upward bias in the earnings multiples, but investors must keep a close on the Federal Reserve and its interest rate policy decisions, since that positive, low-rate environment is not likely to last forever.
Tom Burnett CFA is Director of Research