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May 12, 2021

S&P 500 21Q1 Earnings Review: Gauging the ‘New’ Earnings Season

by Jharonne Martis and Tajinder Dhillon.

Sixty percent of constituents have reported 21Q1 earnings as of April 30 and the quarter is on track for the record books for three reasons:

  • The 21Q1 earnings growth rate of 46.3% is the highest since 2010 Q1.
  • Of the 303 constituents that have reported earnings, 87.1% have beat analyst expectations. This is the highest on record (since 1994).
  • Companies are reporting earnings 22.8% above analyst expectations, which is the second-highest on record (since 1994).

Exhibit 1: S&P 500 Constituents with Earnings Beats

Companies have been handily beating analyst expectations for the last few quarters and this trend shows no sign of abating. The 87.1% beat rate compares to a long-term average of 65.4%. At a sector level, Consumer Discretionary leads the pack with a 96.8% beat rate (50% of constituents have reported thus far). This is followed by Information Technology (94.6% beat rate and 49.3% reported) and Financials (92.7% beat rate and 84.6% reported).

While we have seen the highest beat rate on record in 21Q1, the amount companies are beating by is also at record levels. The earnings surprise of 22.8% compares to a long-term average (since 1994) of 3.6% and a prior four-quarter average of 15.2%.

A combination of a record beat rate and surprise factor has led to the dramatic improvement in the 21Q1 earnings growth rate.

Retail metrics

In the retail arena, positive revenue, earnings growth rates and Same Store Sales are traditionally strong metrics when companies report earnings. This year, however, a positive growth number isn’t necessary a sign of business profit. Moreover, a negative single digit growth rate could suggest that strong business has held up.

This Q1 earnings season is unusual because it marks the beginning of stay-at-home orders from a year ago. Same Store Sales (SSS), a metric used to measure retail sales for stores open at least a year are also referred to as Comparable Store Sales. The issue is there is no comparable year to 2020. Never before has there been a government mandate for retailers and companies to close their physical business. As a result, several retailers didn’t report SSS and many companies withdrew guidance back in Q1 2020.

Nevertheless, we are seeing strong momentum thus far. The 21Q1 earnings growth has improved 22.1 percentage points since the beginning of earnings season, which currently ranks as the largest increase ever since Refinitiv began tracking this data. This compares to a long-term average (since 2002) of 2.5 percentage point earnings growth improvement between the start and end of earnings season.

Exhibit 2: Growth Rates at Beginning vs. End of Earnings Season

Which sectors have been most impactful?

Dissecting the current 21Q1 earnings growth rate shows that Financials, Information Technology, and Consumer Discretionary have been the largest contributors to the current growth rate of 46.3%. Another strong quarter for the “big six” banks has led Financials to 130.1% YoY earnings growth, which translates to an 18.1 percentage point contribution (ppt) to the index growth rate.

Information Technology led by strong results from Apple Inc (AAPL.O) and Microsoft (MSFT.O) has seen 42.5% YoY growth and a 9.8 ppt to the index growth rate.

Finally, Consumer Discretionary has seen 169.6% YoY growth and a 6.2 ppt to the index growth rate.

Least disruptive measure may be E-commerce sales

Because of store closures, consumers were forced to go online to make purchases. As a result, “online sales” is one of the least disruptive measures. This will be the first year where e-commerce sales results will be telling if the flight to online spending looks to become permanent or is fading.

UPS recently smashed its Q1 2021 earnings estimates and CFO Brian Newman said during its earnings call that electronic sales and mail orders, the proxy they use for online sales, is expected to be up 12.7%, following growth of 24.7% in 2020. “The outlook for the commercial side of the U.S. economy is also encouraging,” he said.

Double-digit growth on top of double-digit growth from a year ago suggests that the e-commerce trend might be here to stay.

Meanwhile, last year during the Ulta Beauty Q1 2020 earning call, their CEO said that their Q1 ecommerce sales were right above 100%. This year, Refinitiv is looking at a -1.8% e-commerce growth estimate for Q1 2021. During normal times, a -1.8% e-commerce sales would mean that the retailer is struggling. This year, however, it is an indication that the volume of business held up well – even well above pre-pandemic levels.

This means that this quarter a small negative percentage might actually be a good sign. Take Walmart for example.

Walmart has a -2.2% estimated revenue growth rate for Q1 2021. In normal times a negative growth rate suggests that a company is struggling. However, its Q1 2021 estimated revenue of $131,659M is slightly below last year, but much stronger than the 2019 pre-pandemic revenue of $123,925M (See exhibit below). This suggests that the volume of business has held up well from the strong levels seen during the pandemic.

Exhibit 3: Walmart Revenue: 2019 – 2021

On the flip side, Delta Air Lines is facing easy comparisons from a year ago, when thousands of flights were canceled because of stay-at-home orders. Currently, the airline has an impressive revenue growth rate of 324% for Q2 2021 (see exhibit below). The $6223.83M estimated revenue dollar value for Q2 2021 is considerably stronger than last year’s anemic result of $1428M. However, it is still significantly below the 2019 pre-pandemic level of $12,546M.  Thus, although the 324% growth rate might make it appear that the company is having a strong comeback, it is actually still below 2019 pre-pandemic levels.

Exhibit 4: Delta Air Lines’ Revenue: 2019 – 2021

The same can be said for the retailers in the graph below. They are on track to post double digit Same Store Sales growth, as they are facing easy comparisons from a year ago. Therefore, those Q1 2021 SSS estimates are not an indication of organic growth.

Exhibit 5: Retailers facing easy SSS comparisons: Q1 2020 Actual vs. Q1 2021 Estimate

Source: Refinitiv I/B/E/S

On the other hand, these retailers are facing difficult comparisons from a year ago and have weaker SSS estimates that should not be indicative of weak business.

Exhibit 6: Retailers facing difficult SSS comparisons: Q1 2020 Actual vs. Q1 2021 Estimate

Then there are the top winners — the retailers that have managed to continue posting robust growth on top of difficult comparisons from last year. Some of the names here include retailers deemed essential, including Target, Home Depot and Lowe’s. The strong Q1 2021 estimates also suggest that the nesting theme driven by the pandemic continues to prevail. Thus, consumers continue to invest in staying comfortable and improving the stay-at-home experience.

Exhibit 7: Strongest SSS Performers: Q1 2020 vs. Q1 2021 Estimates

How do earnings compare to pre-pandemic levels?

While 21Q1 is trending to be a monumental quarter, it is prudent to put this in perspective. One way to do this is to compare earnings today vs. pre-pandemic levels. Using 2019 Q1 as a base period, we see that S&P 500 share-weighted earnings have improved 24.0% from $319.4bn to $396.2bn in 21Q1.

At a sector level, Communication Services leads the way with a 54.5% increase in earnings compared to 19Q1, followed by Information Technology (49.6%), and Financials (34.8%).

From a dollar perspective, Information Technology has seen the largest increase ($29.5bn), followed by Financials ($22.4bn), and Communication Services ($15.8bn).

Only three sectors remain below pre-pandemic levels. Industrials are currently expecting $19.5bn in earnings this quarter compared to $29.9bn in 19Q1, resulting in a 34.8% decline when re-based.  Energy earnings are 30.4% off from 19Q1 levels, while Real Estate is only down 1.5%.

Exhibit 8: S&P 500 Share-weighted Earnings ($m)

This will be an encouraging sign for the market, which is looking to see earnings fill rich valuation levels. In April, 21Q1 earnings increased from $336.5bn to $396.2bn, a 17.8% increase, significantly outperforming the S&P 500, which gained 5.3% over the same period.

The FTSE Russell 1000 index is trading at a forward P/E of 23.3x compared to a 10-year average of 16.6x, marking a 40.3% premium.

For additional context, the FTSE Russell 1000 Growth index is trading at a forward P/E of 31.0x compared to a 10-year average of 19.3x, marking a lofty 60.6% premium. In comparison, the FTSE Russell 1000 Value index is trading at a forward P/E of 18.3x compared to a 10-year average of 14.5x, yielding a more reasonable premium of 26.2%.

Analyst estimates continue to rise

There may be a debate as to whether 21Q1 was so strong due to base effects (i.e. low 2020 comparables) or estimates not being raised quickly enough. Regarding the former, 20Q1 did not feel the brute impact of COVID-19 until the middle of March when economies started to lock down, which would indicate that 21Q1 earnings has been a success thus far. Regarding the latter, we are certainly seeing analysts’ estimates being revised upwards off the back of a strong 21Q1 season. Looking at the latest “This Week in Earnings” report, we have seen a sharp increase in the S&P 500 Earnings Estimate Revisions Trend during April.

We continue to see an upward trend in the percentage of upward revisions vs. downward revisions for full-year (FY1) estimates since February 2021. In the latest reading, of the 2,314 analyst estimate revisions that occurred during the week of April 30, 79% of estimates were higher than the previous estimates for FY1.

The upward revisions of 79% is the highest since November 6, 2020 and significantly above the long-term average (since March 2016) of 52%.

As a result, we have seen the 21Q2 earnings growth estimate, improving six percentage points in April (54.0% to 60.0%).

Exhibit 9: S&P 500 Earnings Estimate Revisions Trend

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