April 6, 2021

Breakingviews: Corporate America has its born-again moment

by Breakingviews.

It’s a joyful new day for Corporate America. Covid-19 trashed profitability in the second quarter last year. April 1 kicks off a new period that, for many U.S. companies, will look stellar by comparison. If 50%-plus year-on-year earnings growth comes to pass, it might even justify current valuations.

Activity is already bouncing back, including in some of the areas hit hardest by the pandemic. On Wednesday the number of people traveling through Transportation Security Administration security checkpoints – such as airports – was up nearly 10-fold from the same day in 2020. Meantime, restaurant sales were $54 billion in February, a roughly 80% increase from April last year, according to the National Restaurant Association.

Revenue of S&P 500 Index companies grew 9% in the first quarter compared to the same period last year, according to analyst estimates compiled by Refinitiv, and profit surged an estimated 24%. That’s against a period in 2020 with only a few weeks of pandemic lockdowns baked in. Prognosticators expect much bigger rebounds from last year’s nadir. Earnings of S&P 500 companies are projected to up be more than 50% year-on-year in the second quarter, according to Refinitiv.

Meanwhile, the S&P 500 benchmark is up nearly 20% from its pre-pandemic high last February. By some measures, it looks frothy: the current price-to-earnings ratio, based on the past year’s earnings, is a high 30 times. And Yale economist Robert Shiller’s cyclically adjusted PE ratio, at 35 times, continues to approach dot-com boom levels. Yet investors are supposed to look ahead. Based on earnings forecasts for the coming four quarters, the forward PE ratio for the S&P 500 doesn’t look so outlandish. Yardeni Research pegs it at roughly 22 times, above average for the past 25 years but by no means a high.

Despite recent increases in some bond yields, continuing ultra-low interest rates also help justify high valuations for stocks. The question, though, is whether investors, many now vaccinated or soon to be so, are too easily leaving 2020 behind them. The coronavirus is not yet defeated. Travelers crossing TSA checkpoints, for example, are still 40% fewer than before the pandemic. If the second quarter really starts to leave Covid behind, investors’ bullishness may be justified. For now, they’re running on faith.



Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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