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A Very Strong and Improving Earnings Picture

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

 

  • For the 192 S&P 500 members that have reported Q3 results through Wednesday, October 27th, total earnings and revenues are up +37.6% and +15.3%, respectively from the same period last year, with 82.3% beating EPS estimates and 74.0% beating revenue estimates. The proportion of these 192 index members beating both EPS and revenue estimates is 64.1%. 

 

  • The Q3 earnings and revenue growth rates and the EPS and revenue beats percentages for these 192 index members are below what we saw for the same group of companies in the preceding period, but these metrics are tracking above historical averages.

 

  • For the Technology sector, we now have Q3 results from 54.1% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Tech companies are up +31.8% from the same period last year on +16.2% higher revenues, with 87% beating EPS estimates and 56.5% beating revenue estimates. 

 

  • Looking at Q3 as a whole, total S&P 500 earnings are expected to be up +35.9% from the same period last year on +14.5% higher revenues. This would follow the +95.0% earnings growth on +25.2% higher revenues in Q2.

 

  • Rising cost pressures amid supply-chain disruptions and labor/material shortages will keep the spotlight on margins, which are expected to be up year-over-year as well as sequentially in Q3. The margins trajectory over the coming periods is a key source of uncertainty in the earnings outlook given the lack of visibility with respect to the duration of inflationary pressures.

 

  • Total S&P 500 earnings for the current period (2021 Q4) are expected to be up +21.1% from the same period last year on +11.0% higher revenues. Importantly, estimates have started going up, though the pace and magnitude of positive revisions are still relatively on the weak side. 

 

  • Looking at the calendar-year picture for the S&P 500 index, earnings are projected to climb +44.4% on +11.6% higher revenues in 2021 and increase +8.5% on +6.7% higher revenues in 2022. This would follow the -13.0% earnings decline on -1.7% lower revenues in 2020.

 

  • For the small-cap S&P 600 index, we now have Q3 results from 130 index members or 21.7% of the index’s total membership. Total earnings for these 130 index members are up +40.7% on +18.5% higher revenues, with 76.9% beating EPS estimates and 65.4% beating revenue estimates. 

 

  • Looking at Q3 as a whole for the small-cap index, total earnings are expected to be up +46.9% on +16.6% higher revenues, which would follow the +279.4% earnings growth on +34.5% higher revenues in 2021 Q2.

 

  • The implied ‘EPS’ for the S&P 500 index, calculated using the current 2021 P/E of 23.3X and index close, as of October 26th, is $195.96, up from $135.68 in 2020. Using the same methodology, the index ‘EPS’ works out to $212.70 for 2022 (P/E of 21.5X) and $233.58 in 2023 (P/E of 19.6X). The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

The market has been focused on the rising cost of inputs and labor and other supply chain issue for the last few months. There was tangible nervousness in the market ahead of the start of the Q3 earnings season that these headwinds will start weighing on corporate profits through compressed margins.

We have seen some of that this earnings season, with companies like Brinker International EAT struggling to effectively deal with higher input and labor costs. But many other companies have been able to pass on higher costs to the end consumer, as we saw with MacDonald’s MCD, Kraft Heinz KHC and others.

While these unfavorable cost trends may not have had as much negative impact on earnings as many had feared ahead of the start of the Q3 reporting cycle, they still remain a risk to long earnings trends.

Margin expectations embedded in current consensus earnings and revenue estimates suggest some pressures, as you can see below.

Image Source: Zacks Investment Research

But this is expected to be nothing more than a temporary speed bump. This becomes clear in the annual margins picture seen below.

Image Source: Zacks Investment Research

The chart below provides a big-picture view of earnings on a quarterly basis.

Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Image Source: Zacks Investment Research

We remain positive in our earnings outlook, as we see the overall growth picture steadily improving, as the near-term logistical issues get addressed.


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McDonald's Corporation (MCD): Free Stock Analysis Report
 
Brinker International, Inc. (EAT): Free Stock Analysis Report
 
The Kraft Heinz Company (KHC): Free Stock Analysis Report
 
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