With 56% of companies (worth 73% of market capitalization) of the S&P 500 index having reported results for Q4 2021, it is shaping up to be another remarkable quarter for corporate America. Compared to the same period last year, sales for S&P 500 companies are coming in 16% higher, while earnings are coming in a whopping 27% higher. This implies that profit margins have been rising, which is no easy feat with inflation running at a 40-year high, and suggests companies retain strong pricing power. If these numbers hold through the end of reporting season (and estimates suggest they may even improve), then this would be the fourth straight quarter of earnings growth above 25%. The last time this happened was between Q4 2009 and Q3 2010, not surprisingly at a time when the economy was recovering from another severe recession.
While that record is likely to end at four quarters once again, earnings growth is expected to remain very strong going forward. Despite all the equity volatility so far this year, analysts haven’t turned any less optimistic on the outlook for earnings. In fact, forward-looking estimates have actually increased since the start of the year. The latest bottom-up estimates point to earnings growing by about 10% per year over the next two years. While that is much lower than the unsustainable 25+% growth we have enjoyed over the last four quarters, it is much higher than the long-term average earnings growth rate of about 6% per year. Given a backdrop of a synchronized global reopening, plentiful liquidity, strong consumers and no recession in sight, we see no reason why those expectations should be disappointed.
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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