Though news every day pushes stock prices up and down, the long term driver of the stock market is company profits. Today I would like to share with you an article published Monday regarding the 2nd quarter earnings season by JP Morgan, one of the Portfolio Strategists we utilize for client accounts.
With early reporters in the door (10.9% of market cap), our current estimate for 2nd Quarter 2021 S&P 500 operating earnings per share (EPS) is $46.19 ($36.82 ex-financials). If realized, this would represent year-over-year (y/y) earnings growth of 72.4% and an increase of 15.1% from 2nd Quarter 2019. However, earnings growth is slowing on a sequential basis, with current estimates pointing to a contraction of 2.6% quarter-over-quarter. At the sector level, financial company results have beaten expectations; however, this was primarily driven by another round of reserve releases, and the key question going forward will center on the consumer’s willingness to take on more debt. The industrial sector is set to see significant y/y gains in EPS, as the airline industry is expected to be cash flow positive and profitable for the first time since the pandemic began.
As the earnings season continues to unfold, we expect materials, health care and technology to post strong results compared to both last year and 2019. Looking ahead, current full year consensus estimates are tracking y/y EPS growth of 57.6% for 2021 and 10.6% for 2022; if these forecasts are realized, and 2023 sees earnings grow at an average pace, the S&P 500 forward P/E ratio could fall to 20.1x by 4Q22, assuming the S&P 500 price index grows at its historical average growth rate. However, much of this will depend on whether companies can defend profit margins, particularly in the wake of higher costs as reflected in the June CPI report.