Jul 26, 2021 - Economy

Companies clear an already high earnings bar

Illustration of stacks of money progressively getting larger with the last one so tall that it goes off screen.

Illustration: Aïda Amer/Axios

Companies have been reporting earnings growth that's way up — even overshooting expectations put out by Wall Street’s analysts.

Why it matters: Earnings growth is the key driver of stock prices.

  • Going into earnings season, companies had signaled to analysts that earnings would be stronger than what analysts were forecasting, forcing those analysts to revise up their already high estimates.
  • The fact that stock prices have been trading near all-time highs suggests a lot of optimism for future earnings had already been priced into the market.

By the numbers: Through Friday, 24% of S&P 500 companies reported Q2 2021 quarterly financial results, according to FactSet.

  • Of those companies, a whopping 88% have reported better-than-expected earnings. If the trend continues, it would be the highest percentage of quarterly beats since FactSet started tracking this data in 2008.
  • Altogether, these companies on average have reported earnings that are 19% above what analysts had forecast, which is above the five-year average, a 7.8% beat.
  • At this pace, S&P 500 companies will have reported earnings growth of 74.2% year over year, which would be the highest growth rate since Q4 2009.

The big picture: What makes this performance notable is that it occurred during a time when inflation heated up by more than what economists were expecting, and executives had been warning about it.

What they’re saying: "I’m not surprised by the strong earnings results; it’s in keeping with high expectations supported by massive stimulus," Principal Global Asset Allocation CIO Todd Jablonski tells Axios.

  • "It’s possible, however, that Q2 will mark both peak recovery for the U.S. economy and earnings improvement expectations. The outlook for the second half of 2021 appears more complicated, given concerns over economic momentum and inflationary forces."

What to watch: A third of S&P 500 companies are announcing earnings this week. Big names providing results include tech giants Apple, Microsoft, Alphabet, Amazon and Facebook.

The bottom line: Just because expectations for earnings seem high doesn’t mean companies can’t beat them. Analysts are giving their best estimates in a turbulent time, and companies are doing their best not to disappoint.

Editor's note: This post has been corrected to show it was Principal Global Asset Allocation CIO Todd Jablonski who provided a quote to Axios (not Principal Global Investors chief strategist Seema Shah).

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