Since the onset of the pandemic, earnings have surprised to the upside by a significant margin. While analyst estimates are typically reliable, it seems likely that many modelgrossly underestimated the strength and pace of the economic recovery, leading to earnings projections that were overly pessimistic. That being said, with the 2Q21 earnings season approaching, we believe that earnings will come in well above current estimates, and are forecasting an earnings surprise of 14.6% for the S&P 500. This would represent a decline from the 23.7% surprise observed in 1Q21, but would still be above the long-run average of 7%. Going forward, earnings growth will hinge on the resiliency of profit margins. Revenue growth should remain robust through year-end, but at the same time, companies will continue to be faced with cost increases due to supply chain disruptions and higher wages. If firms can defend margins by increasing prices, inflation may move higher, pushing the Federal Reserve to pull forward its plans for tightening and potentially weighing on earnings growth. However, if firms find that demand is elastic and price increases lower revenues, they will need to find alternative levers to preserve profits. The bottom line is that earnings growth seems likely to slow as we approach 2022, but this does not seem to be reflected in analyst estimates. This suggests that estimates may need to decline if a trend of elevated surprises is to continue.
-JP Morgan
Happy Monday. Good Luck out there this week.
Global Spotlight
U.S. lawmakers to discuss Xinjiang export bill. Amid growing bipartisan support for a tougher U.S. response to China’s crackdown on its Uyghur minority, the U.S. House of Representatives Foreign Affairs Committee will meet June 30 to consider the Ensuring American Global Leadership and Engagement Act (Eagle Act), which includes the text of the sweeping Uyghur Forced Labor Prevention Act.
OPEC+ to boost production. OPEC+ will meet on July 1 to finalize production plans for the month of August. Leaks have been sparse, but OPEC+ has so far taken a cautious approach to boosting production, which is likely to remain the case.
Putin and Xi to hold call. Chinese President Xi Jinping and Russian President Vladimir Putin will hold a video call on June 28 to mark the 20th anniversary of the Russian-Chinese Treaty on Good-neighborliness, Friendship and Cooperation.
The EU to launch its COVID-19 health certificate. The European Union’s COVID-19 certificate will officially become operational starting July 1.
Algeria to start government formation talks. On June 27, Algerian President Abdelmajid Tebboune will begin talks with party leaders and independent members of parliament to form a government coalition.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 21Q1 earnings are expected to increase 52.8% from 20Q1. Excluding the energy sector, the earnings growth estimate is 53.4%.
- Of the 499 companies in the S&P 500 that have reported earnings to date for 21Q1, 87.4% have reported earnings above analyst expectations. This compares to a long-term average of 65% and prior four quarter average of 76%.
- 21Q1 revenue is expected to increase 13.5% from 20Q1. Excluding the energy sector, the growth estimate is 14.4%.
- During the week of June 28, five S&P 500 companies are expected to report quarterly earnings.
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