Liz Looks at: Q2 Earnings Season

The Rubber Hits the Road

Second quarter 2021 earnings season kicks off next week with releases from many of the big financial companies, plus a smattering of releases from consumer staples and industrials. On the whole, earnings growth for the S&P 500 is expected to come in at +64% YoY; if that estimate holds it will be the strongest quarterly growth rate reported by the index since Q4 2009.

Looking Beyond the Base Effects

At the risk of over-using this term, there are base effects (comparing these results to the rock bottom earnings of Q2 2020) that will make this quarter seem unusually impressive and ignite conversations about peak growth. So instead of comparing to the second quarter of last year, it may be more useful to compare to the second quarter of 2019 before Covid-19 was even a figment of our imagination (imagine that).

In doing so, you’d find that the companies in the S&P 500 are expected to grow earnings by about 10% compared to Q2 2019, which is a strong number and more indicative of the recovery path we’re on. What this specifically says to me is that the “rebound” (back to pre-pandemic levels) has occurred and we’re now on a path of generating new growth in the “recovery” phase. That’s a good place to be.

Recommended: 2021 Mid-Year Outlook

Raising the Bar

Expectations are important during earnings season, perhaps more than during any other period. By this, I mean not only the expectations for the current quarter’s results and whether a company beats or misses expectations, but also by how much those expectations changed over time.

The estimates for Q2 are at post-pandemic highs, but what’s more – so are the revisions to those estimates. As the quarter was underway, analysts increased their earnings estimates by 7.3%. That may not sound like a big number, but given that analysts usually decrease their estimates, it’s meaningful. In fact, over the last 15 years, analyst estimates have decreased an average of 5% over the course of a quarter.

Pulling back the curtain, we can see that the notable areas of earnings strength are expected to be in the cyclical sectors of industrials, consumer discretionary, materials, and energy. Not all that surprising given the pain they felt during spring of last year. Conversely, sectors labeled as defensive, such as consumer staples and utilities, are expected to put up the least inspiring results.

The Market Is the Audience

At the end of it all, the market’s reaction to these historically strong expectations and the actual results should be interesting. During the second half, markets are likely to be looking for a catalyst to continue their upward move; strong earnings reports may be just that. As I’ve said before though–it’s more about expectations than events. Given the now high expectations, markets may prove tough to impress. Either way, a solid quarter of earnings growth is another notch on the recovery belt and one that bodes well for long-term investment potential.

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