Last week I posted that the main driver of long term stock market returns is company profits. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote the following about first quarter 2021 profits in their weekly market Recap…
With more than 90% of S&P 500 market cap having reported earnings, our current estimate for first quarter 2021 operating earnings per share (EPS) is $47.29, representing year-over-year growth of 143%. In a sharp departure from 2020, these positive results have been spread across all sectors, with those areas of the market hit hardest by pandemic now leading the charge.
The energy sector is tracking earnings growth of over 900% following the collapse in energy prices a year ago, while financials are expected to see earnings growth of 146% as massive loan loss reserve releases, a steeper yield curve and robust capital markets activity offset weak loan demand. Additionally, increased levels of consumer spending and mobility have supported results in consumer discretionary and industrials, which are currently tracking growth of 118% and 39% versus a year ago, respectively.
Looking ahead, earnings growth should be very strong in 2021, but could slow as profit margins come under pressure next year; many management teams cited profit headwinds stemming from higher input costs in their quarter results, noting the impact of rising commodities prices and transportation costs specifically. These findings are further evidenced by the April CPI report, which saw the largest monthly increase in more than a decade. Although this surge is likely “transitory,” it reflects a rapidly improving economy, strengthening the case for cyclical stocks and posing a challenge for long-duration bonds.