Earnings Growth Gets Much More Difficult From Here

September 2, 2021

By: Wayne Duggan

Second-quarter earnings season is winding down, and S&P 500 companies have put up some extremely impressive earnings growth numbers. Unfortunately, earnings growth will likely start getting much more difficult starting in the 2nd half of the year.

The Numbers
In the 2nd quarter, S&P 500 companies have reported 89.3% year-over-year earnings growth so far. That growth rate represents the highest earnings growth in a single quarter since the 4th quarter of 2009.

Of course, any investor who hasn’t been hiding under a rock in the past 2 years understands there’s a good reason for that extreme growth rate. In the 4th quarter of 2009, companies were lapping the same period of 2008, during which the financial crisis ravaged the economy. This year presents a similar situation. Earnings growth in the 2nd quarter this year was exceptional in large part because the economy was in a pandemic lockdown in the 2nd quarter of 2020.

Still, 2nd-quarter earnings numbers were much better than analysts expected. In fact, 87% of S&P 500 companies have reported earnings that beat consensus analyst estimates. Since the pandemic began in the 2nd quarter of 2020, S&P 500 companies have beaten analyst earnings estimates by an average of 19%. That number represents far more surprise upside than the 2% earnings beat S&P 500 companies averaged from 2000 through 2019.

Earnings Party Ending?
The easing of lockdowns and restrictions began in the 2nd half of 2020 and really started to ramp up in the 1st quarter of 2021. For investors, that means that near 90% earnings growth is likely an unreasonable expectation in the 2nd half of the year. In addition, inflation and labor shortages have begun eating into margins and profitability.

In the 2nd quarter, S&P 500 earnings per share were up 27% compared to pre-pandemic 2019 levels. Looking ahead, analysts are calling for that 2-year growth rate to drop to 17% in the 3rd quarter before bouncing back to 22% in the 4th quarter.

For the full year, analysts are now expecting S&P 500 earnings per share (EPS) of $201.19, up 44% year-over-year and 26.2% from 2019. Looking ahead to 2022, analysts are expecting just 9% year-over-year EPS growth.

More Risks Ahead
While 9% growth isn’t particularly bad, there are plenty of risks out there that could drop that earnings growth rate even further. Bank of America estimates every 0.1% rise in hourly wages decreases S&P 500 profit margins by 0.04%. An end to stimulus payments and the federal eviction ban could also weaken consumer sentiment. But perhaps the biggest threat to S&P 500 earnings in the quarters ahead is a potential tax hike. U.S. President Joe Biden has said he intends to raise corporate taxes from 21% to 28%. Bank of America economists estimate a tax hike could cut 5% off S&P 500 earnings in 2022.

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