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Company earnings are rebounding, but anything short of perfect could be trouble. | Press "Enter" to skip to content

Company earnings are rebounding, but anything short of perfect could be trouble.

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First-quarter earnings season picks up steam this week, with analysts expecting that profits for S&P 500 companies rose roughly 27 percent in the three months through March, compared with a year earlier when the pandemic sent corporate earnings into a tailspin.

Companies such as United Airlines, Netflix, AT&T and American Express all slated to issue results this week, offering a relatively well-rounded look at the state of corporate America in the early days of what could be a powerful year for the U.S. economy. It might also help set expectations for the stock market, after a big rally already this year.

The consensus among 76 economists polled by Bloomberg is that gross domestic product will expand by 6.2 percent in 2021, which would make it the best year for economic growth since 1984. And sentiment among analysts covering the stock market is almost universally bullish, given that strong economic tailwind.

“You’d almost have to be self-deceiving to expect U.S. companies overall to underperform consensus, given how the macro backdrop is driving revenues so well,” wrote John Vail, chief global strategist at Nikko Asset Management.

The expectations for profit growth are even more elevated for the current quarter: Analysts expect that the three months ending in June will see companies in the S&P 500 notch a 54-percent rise in profits, compared with the prior year.

That increase, of course, reflects a rebound from the worst of the pandemic-bred downturn. But it also is a result of “economic re-acceleration, and a rebound in commodity prices,” said Jonathan Golub, a stock market analyst at Credit Suisse.

Of course, if everyone is expecting such a surge in profits, the good news could already be fully incorporated into stock prices — and that means anything short of perfect results would make for a difficult stretch for stocks.

That has certainly been the case with some of the banks that reported earnings last week. Shares of Morgan Stanley, for example, dropped 2.8 percent on Friday even though the bank reported record revenue and profit.

The S&P 500 is already up more than 11 percent in 2021, and hit yet another record high on Friday.

That could mean the market is due for a pullback anyway. The index is relatively expensive by metrics such as the price-to-earnings ratio, which compares stock prices as a share of expected corporate profits over the next 12 months.

The S&P 500 is trading at nearly 23 times expected earnings. That’s roughly the valuation the index has held for most of the past year, but it’s very high by historical standards.

Over the last 20 years, the S&P 500 has traded at an average of 16 times expected earnings.

By comparison, a valuation of 23 times expected earnings is closer to where stock market valuations stood at the tail-end of the dot-com bubble of the late 1990s. When that ended, the S&P 500 fell roughly 50 percent before it hit bottom.


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