The first quarter earnings season currently underway is a stark contrast to the earnings results for the first quarter of 2020.

This time last year, concerns had shifted on the divergence between the real economy and financial markets, with equity markets already on the path towards recovery, while economic indicators pointed at a recessionary environment. On top of that, the first quarter earnings season in 2020 was characterised by the impact of the covid-19 pandemic on the underlying sectors, the lack of willingness for companies to provide future guidance, the acceleration towards digitalisation and focus on cost tightening, as well as the removal or reduction of shareholder returns through dividends and share buybacks.

Fast forward a year later, and equity markets in the US have surged to a level 25% higher than pre-covid-19 levels. Although on a relative basis Europe is trailing behind, equity markets have also fully recovered and trading 4% higher than the peak in 2020. The positive returns are inherently tied to a more positive outlook, which not only is characterised by economic growth expectations, but also concerns over an overheating economy in the US.

Albeit that absolute valuations have come down slightly, the levels still stand relatively higher compared to historic trends. US equities, represented by the S&P 500 index are currently trading at 22 times forward earnings, compared to a five year average of 18 times. Similarly, European equities, gauged by the Eurostoxx 600 index, are currently trading at 17 times forward earnings compared to a historical average of 15 times.

At these valuation levels, the earnings growth momentum is the sole key driver for returns in the next stage of economic cycle. With the majority of US and European companies having now reported their earnings announcements, the first quarter earnings season presents further insight to the progress of the earnings recovery more than a year since the start of the covid-19 pandemic.

In the US, despite the continued improvement in earnings expectations for the quarter, 70% of companies that have reported, managed to beat sales expectations. Moreover, 87% of US companies reported better than expected earnings. These positive earnings results also reflect an aggregate of 10% sales growth for the first quarter, while earnings expanded by 47%. This significant growth, which was better than expected, continues to confirm the rebound in the US economy. More importantly, the strongest results continue to be recorded by the hardest hit sectors, as the economy reopens. This includes companies within the consumer discretionary, financials, materials and communication services sectors.

On a sector level, the strongest earnings surprises were reported by industries within the consumer discretionary sector, particularly automobiles and retail. General Motors, Ford Motor and Tesla all announced a strong beat on bottom line, while out of the retail companies that reported, Amazon and Etsy posted strong surprises. Interestingly, utility companies also performed better than expected on their top line, particularly gas and electric utility companies that benefitted from the higher consumption. Notwithstanding, all types of financial companies, from banks to insurance, locked in better than expected results, with an overall earnings surprise of 35%.

A similar trend is taking shape in Europe, with the cyclically dependent sectors reporting better than expected financial results. Even so, the results are relatively weaker or less widespread, with 57% of companies that have reported announcing better than expected sales, and less than half beating earnings expectations. A mixed picture continues to characterise the region with consumer staples companies, intrinsically defensive, reporting the highest earnings growth. Even so, this sector so far has the worst performance compared to expectations, particularly for European tobacco and beverages companies. Unlike the US, where the energy sector returned to growth, European energy companies recorded an overall 11% sales contraction during the first quarter and also underperformed sales expectations.

On a positive note, European financials outperformed this earnings season, posting strong sales and earnings growth, beating bottom line expectations by 50%, thanks to trading results and lower provisions for bad debt. The material sector, particularly metals and mining also recorded a strong first quarter season, having benefitted from the surge in commodity prices.

Overall, despite the divergence in the economic recovery between the regions, this year’s first quarter’s earnings season was characterised by better than expected overall sales and earnings results, improving macro-economic outlooks and for most, the reintroduction of dividends and share buybacks. Nonetheless, despite the upbeat outlook, equity prices and market sentiment have also come a long way in the recovery, strengthening the view that continued earnings growth momentum, across the broader economy, remains key to sustain current price levels.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which 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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