by Tajinder Dhillon.
Approximately 90% of constituents have reported 21Q2 earnings and it has been another milestone quarter. Blended earnings growth this quarter is currently 93.1%, the highest since 2009 Q4.
Notably this quarter represents ‘easy year-over-year (YoY) comparisons’ given that the trough in earnings occurred in 20Q2. However, even if we look at quarter-over-quarter growth (21Q2 vs. 21Q1), we see an earnings growth rate of 6.4%, which impressive given the high-watermark set last quarter with $413.1bn in aggregate earnings.
We also continued to see a strong improvement in the earnings growth rate as the quarter progressed. At the start of earnings season, 21Q2 earnings growth was forecasted at 65.4%. Comparing the growth rate today vs. the start of earnings season marks a 27.7 percentage point (ppt) increase, which is the 2nd highest increase since Refinitiv began tracking this data. The largest gain was last quarter (21Q1) where the earnings growth rate increased by 28.5 ppt from the start to end of earnings season.
While much attention is paid to earnings, we also saw an improvement in top-line growth this quarter. 21Q2 revenue growth improved from 18.5% to 23.5% over the same period, which is the largest improvement when looking back over the last nine quarters.
The percentage of constituents that have beaten earnings expectations this quarter stands at 87.4%, which is tied for the highest beat rate on record. In a typical quarter (since 1994): 66% of companies beat estimates and 20% miss estimates.
Just as encouragingly, the percentage of constituents that have beaten revenue expectations this quarter stands at 87.1%, which is highest beat rate on record as shown in Exhibit 1. For context, in a typical quarter (since 2002): 61% of companies beat estimates and 39% miss estimates.
Exhibit 1: Historical S&P 500 Beat/Match/Miss Rates
Looking into the earnings surprise data more closely, Exhibit 2 highlights the top 20 constituents that had the largest share-weighted earnings surprise. Financials continued to release loan loss reserves from the pandemic which helped beat analyst expectations.
FAAMG stocks as defined by Facebook, Amazon, Apple, Microsoft, and Alphabet also continued to deliver robust earnings vs. analyst expectations. As a group, FAAMG earnings growth this quarter was 89.6% YoY, in-line with the overall index. However, revenue growth was 35.9%, which exceeded the index revenue growth rate of 23.5%.
Exhibit 2: S&P 500 Top 20 Earnings Surprise
Within FAAMG stocks, Amazon was the only company who reported revenues which fell short of analyst expectations ($113,080m actual vs. $115,201m consensus). This was first miss since 2018 Q3. As a result, the stock moved sharply down 7.6% which ranked as the 10th largest daily decline over the last decade.
Companies have continued to beat analyst expectations by a significant margin for the fifth consecutive quarter. More specifically, the earnings beat rate over the last four quarters have been 87.4% in 21Q1, 79.3% (20Q4), 84.4% (20Q3), and 82.6% (20Q2) respectively.
The market has become accustomed to companies beating analyst estimates when they report. Therefore, it would be important to investors to keep a close eye on companies that miss earnings to avoid an aggressive price reaction as was the case in Amazon.
Using Refinitiv Eikon, investors can rely on the Earnings Season app to monitor earnings season in real-time as it unfolds. To access this app, type “EARN” in Eikon search. The Earnings Season App allows you to monitor the current earnings season as it unfolds, detailing developing trends of companies that have already reported and how they may impact companies that have yet to report. Analytics are displayed at the aggregate and company level to support idea generation.
Within the app, users can load any list, portfolio, ETF, Lipper Fund, or index (permission depending). For example, Exhibit 3 highlights 21Q2 earnings season data for the FTSE Russell 1000 index.
Exhibit 3: Earnings Season App (EARN) – FTSE Russell 1000 Index
For the FTSE Russell 1000 index, the 21Q2 earnings beat rate is currently 82% with an earnings surprise of 16.7%. The earnings year-over-year growth rate is forecasted at 97.5% YoY.
The “Price Reaction – 2d” is designed to highlight price reaction after a company reports earnings. Companies who beat expectations have not been rewarded by the market, as the aggregate price movement is -0.5% for companies that beat.
Conversely, companies that miss expectations have seen an aggregate price movement of -1.4%. High growth companies are likely to see amplified price movements as seen in the Information Technology sector. The sector has the largest negative price reaction amongst all sectors with an aggregate price move of -7.3% for those companies that miss earnings.
It will be a long time before we see earnings growth like we have seen this quarter. However, off the back of a strong 21Q2 earnings season, analysts have been revising growth expectations upward for 21Q3.
21Q3 earnings growth is currently forecasted at 29.8% as shown in Exhibit 4, which has already increased 10.3 ppt from April 1st, when the growth rate was 19.5%.
We see a similar movement in the 21Q4 growth rate, where it is currently 21.5% and has increased 8.1 ppt over the same period.
As higher expectations continue to be played out, it will be paramount for investors to monitor downside risk during earnings season.
Exhibit 4 – S&P 500 Earnings Growth Rate History
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