With a quarter of the S&P 500 listed companies having already reported second quarter results, the picture emerging so far is one of all-round strength, with impressive momentum particularly on the revenue side. Going into the current reporting season, the consensus forecast among analysts originally called for revenue growth of over 20%, and earnings growth of nearly 70%.

Overall, 24% of the companies in the S&P 500 had reported actual results for Q2 2021 by the end of last week, based on data provided by Factset. Of these companies, 88% have reported actual EPS above estimates, which is above the five-year average of 75%. In aggregate, companies are reporting earnings that are 19.0% above estimates, which is also above the five-year average of 7.8%.

A big part of the strong Q2 earnings growth is obviously due to the easy comparisons to the year-earlier period that represented the bottom of the Covid-19 earnings impact. However, second quarter estimates also reflect genuine growth, with the total S&P 500 earnings expected to be up +16.1% from the pre-Covid 2019 second quarter period.

The sectors that are coming out particularly strong in this period include Technology, Basic Materials, Medical, Retail and Construction. On the flipside of that, the sectors whose earnings are expected to remain below the comparable 2019 period include Transportation, Consumer Discretionary, Autos and Energy.

Looking at the calendar-year picture for the S&P 500 index, earnings are projected to climb +37.1% on +11.1 higher revenues in 2021 and increase +10.6% on +6.% higher revenues in 2022. This would follow a decline of -13.1% in 2020 on -1.7% lower revenues. Last year’s June quarter represented the peak of the pandemic’s earnings impact when the S&P 500 earnings dropped -32.2% from the year-earlier period.

Meanwhile, the blended net profit margin for the S&P 500 for Q2 2021 is 12.4%, which is above the 5-year average of 10.6% and the year-ago net profit margin of 8.6%, but below the previous quarter’s record-high net profit margin of 12.8%. At the sector level, nine sectors are reporting a year-over-year increase in their profit margins in Q2 2021 compared to Q2 2020, led by the Financial sector (21.3% vs. 8.6%), Industrials (8.4% vs. 2.3%), and Materials (14.5% vs 8.6%). Ten sectors are reporting net profit margins in Q2 2021 that are above their 5-year averages, led by the Financials (21.3% vs. 15.5%) and Materials (14.5% vs. 9.3%) sectors.

At this point in time, 12 companies in the index have issued EPS guidance for Q3 2021. Of these 12 companies, 4 have issued negative EPS guidance and 8 have issued positive EPS guidance. The percentage of companies issuing positive guidance is thus 67%, which is well above the 5-year average of 37%.

From a valuation point of view, the forward 12-month P/E ratio of the S&P 500 is 21.3. This P/E ratio is above the 5-year average of 18.1 and above the 10-year average of 16.2. However, it is slightly below the forward 12-month P/E ratio of 21.4 recorded at the end of the second quarter. Since the end of the second quarter, the price of the index has increased by 1.6%, while the forward 12-month EPS estimate has increased by 1.8%. The bottom-up target for the S&P 500, based on consensus estimates is 4831.98, which is 9.7% above last Friday’s closing level of 4411.79. At the sector level, the Energy and Materials sectors are expected to see the largest price increases, as these two sectors have the largest upside differences between the bottom-up target price and the closing price. On the other hand, the Real Estate sector is expected to see the smallest price increase, based on the same criteria.

During the current week, 180 S&P 500 companies (including 10 Dow 30 components) are scheduled to report results for the second quarter, including the biggest tech names – Apple, Microsoft, Amazon, Alphabet and Facebook. Tesla is also reporting, as are industrial heavy weights Boeing and Caterpillar together with a slew of consumer names, such as Procter & Gamble and McDonald’s.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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