October 5, 2021

S&P 2021Q2 Earnings Recap: Moving Past Peak Earnings Growth

by Thomas Alonso.

With 2021Q3 earnings season upon us, we look at aggregate performance and EPS estimates of the 11 S&P500 sectors during the 2021Q2 earnings season and peek ahead at expected results for the current quarter.

Exhibit 1 below, reproduced from our daily/weekly S&P 500 Earnings Scorecard (available here), shows the impressive results in 2021Q2 for the S&P 500. The 96.3% YoY growth rate is the best since 2009Q4, and the 87.8% of companies beating earnings is the highest since 1994. This led to a 30.8 percentage point increase in the 2021Q2 YoY earnings growth rate since the start of 2021Q2 earnigns season, the largest improvement on record dating back to 2002Q3.

Exhibit 1: S&P 500 Earnings Scorecard Dashboard

Source: I/B/E/S data from Refinitiv

Looking at 2021Q2 results in a longer context shows how strong results were. Exhibit 2 below depicts YoY growth for the past nine quarters and shows that earnings growth rates have likely peaked as results lap easier pandemic-impacted comparisons.

Exhibit 2: S&P 500 Historical and Estimated YoY Growth Rates

In Exhibit 3 below, we use the Preferred Earnings Analysis template in the EARN app in EIKON to show the aggregate performance of the S&P 500 sectors during the 2021Q2 earnings season. We see that despite the large earnings beats, on average most stocks were down after reporting (Price Reaction – 2d columns – box 1 below). Further, we see that forward EPS revisions were flat, with the mean revision over the prior 30 days just 0.1% (box 2 below).

Exhibit 3: 2021Q2 Earnings Performance via EARN App

Source: EIKON

Using the EARN app, we can customize the view to see how earnings growth is stacking up. For Exhibit 4 below, we looked at the 2021Q2 results and the change to the mean estimate for 2021Q3 over the prior 60 and 30 days. As shown below, in the aggregate S&P 500 estimates for the coming quarter were revised higher by about 1.6% on average over the prior 60 days and 0.2% over the past 30 days.

Looking at sector results, we see that industrials which had the best earnings growth in 2021Q2 quarter saw 2021Q3 estimates revised down by 14.0% over the prior 60 days, and 2.0% over the prior 30, with the group down 0.8% on average since the beginning of the quarter.

Similarly, the energy sector, which had 244.4% YoY growth in 2021Q2, had generally strong upward revisions over the prior 60 and 30 days, and has the highest expected YoY growth in 2021Q3, saw average an QTD price change of -7.6% (through Sept. 20).

Exhibit 4: EARN App View of Forward Earnings and Price Performance

Source: EIKON

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On June 24, we published our 2021Q2 earnings outlook piece (here), and noted the expected top 20 contributors to 2021Q2 earnings. Exhibit 5 below is reproduced from that report and shows the expected percentage point (PPT) contribution to earnings growth in 2021Q2, prior to the start of earnings season.

Exhibit 5: Expected Earnings Growth Contribution in 2021Q2 as of June 24

In Exhibit 6 below, we show the actual contribution to 2021Q2 earnings from the top 20 companies as of the end of earnings season.

Exhibit 6: Actual Earnings Growth Contribution in 2021Q2

Many of the expected top earnings contributors remained the same, but we would note a few changes in the actual results compared to the expected, outlined in Exhibit 7 below. First, the results for most were better than expected, with the top 20 contributors accounting for 42.3 PPT of overall growth compared to an estimated 29.6 PPT.

Exhibit 7: Predicted vs. Actual Top 20 Earnings Growth Contributors

Second, while most industry sectors had a larger impact, the industrials saw their contribution fall to 4.0 PPT from an estimated 4.7 PPT, as only three of an expected five companies were in the final top 20.

Compare this to the financials, which saw a 4.9 PPT increase in their contribution to earnings growth. Much of the improvement in earnings for the financials came from the Diversified Banks sub-industry. As we noted in our Aug. 18 report, U.S. Earnings Growth Helped By Bank Reserve Releases, EPS beats for the banks were large with an average surprise factor of 27.8%, helped by a YoY decline of $48.9 billion in provision expense for banks in the S&P Bank Index.

Lastly, the healthcare sector had a much stronger than expected showing, with two companies in the top 20 accounting for 2.0 PPT of growth compared to expectations for none in the top 20.

With 2021Q3 earnings soon to begin, we’ll be turning our attention to expectations for the current quarter in an upcoming post.

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