by Tajinder Dhillon.
As we enter 21Q4 earnings season, market participants and analysts are noting the blistering pace of earnings growth and the record percentage of companies beating analyst expectations. The key question is, can this momentum be maintained in the face of various headwinds?
The current 21Q4 blended earnings growth rate of 48.5% confirms the beginning of a transition to more reasonable year-over-year (YoY) growth rates off the back of a historical 21Q1-21Q3 earnings season where YoY earnings growth was 96.4%, 152.6%, and 60.5% respectively. This is shown in Exhibit 1.
Exhibit 1: STOXX 600 YoY Growth Rates
In a typical quarter (since 2018), YoY growth expectations decline by an average of 1.4 percentage points (ppts) from the start of the quarter to the start of earnings season. Seeing an increase in growth expectations heading into earnings season is uncommon, but we have seen exactly this behavior for the fourth consecutive quarter.
Although 21Q4 earnings growth expectations have remained relatively flat over the last two months having changed from 48.0% on November 2nd to 48.5% on January 11th, a 0.5 ppts improvement. A possible explanation for the lack of earnings improvement vs. prior quarters is due to heightened reservation amongst analysts raising estimates given the current headwinds of the Omicron variant, supply chain bottlenecks, rising inflation, and potential interest rate hikes from the Bank of England and European Central Bank.
While no companies have reported 21Q4 earnings thus far, we have observed a sharp increase in the percentage of companies that beat earnings expectations when reporting as shown in Exhibit 2. 20Q4-21Q3 have seen earnings beat rates of 64.4%, 71.7%, 63.2%, and 63.3% respectively, which is well above the long-term average (since 2012) beat rate of 52.0%.
Exhibit 2: STOXX 600 Beat Rate %
Exhibit 3 shows 21Q4 earnings and revenue growth rates at an index and sector level. The Energy sector growth rate is currently forecast at 310.5%, which is by far the highest sector growth rate and is expected to be the 3rd largest YoY growth rate for the sector since Refinitiv has tracked this data. This follows the 546.9% YoY growth in earnings the energy sector posted in 21Q3 as the sector continues to recover from the collapse in oil prices last year.
Exhibit 3: STOXX 600 21Q4 Growth Rates
From an earnings contribution perspective, the energy sector is currently forecasted to contribute 16.7 ppts towards the index growth rate of 48.5%, by far the largest of any sector despite being only the 8th largest sector by market cap.
This is followed by Financials (12.6 ppts), Industrials (5.4 ppts), and Basic Materials (5.0 ppts). These three sectors combined with the Energy sector are expected to contribute almost 82% of the overall index growth (39.7 ppt to the 48.5% 21Q4 earnings growth rate).
Looking at the latest STOXX 600 Earnings Outlook, we observe a sharp increase in the number of current full-year (FY1) analyst estimates being revised upwards over the last seven days for week ending January 11th. There have been 797 analyst estimate revisions for the week ending Jan 11th, where 467 estimates were increased in comparison to 330 downgrades. As shown in Exhibit 4, this results in an upward revision ratio of 59%, which is above the long-term average (since 2018) of 49%.
Exhibit 4: STOXX 600 Earnings Estimate Revision Trend
At a company level, B&M European Value Retail SA (BMEB.L) saw the highest number of FY1 EPS upgrades over the last 7 day period ending January 11th (12 upgrades), followed by Pernod Ricard SA (PERP.PA) (11 upgrades), Next PLC (NXT.L) (8 upgrades), Compagnie Generale des Etablissements Michelin SCA (MICP.PA) (7 upgrades), and L’Air Liquide Societe Anonyme pour l’Etude et l’Exploitation des Procedes Georges Claude SA (AIRP.PA) (6 upgrades).
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