Two reasons why the S&P 500 will see its fastest-ever earnings recovery, DataTrek saysNovember 16, 2020
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- Corporate profits will likely stage the fastest-ever recovery in 2021 as companies gear up for the reopening of the US economy, according to a Monday note from DataTrek Research.
- Wall Street estimates currently call for record S&P 500 profitability in 2021, with earnings growth set to return in the second quarter, according to the note.
- “The only time you can pencil in 14 points of leverage, as the Street is doing now for 2021, is very early in an economic cycle,” DataTrek said.
- Here are the two reasons why corporate profits are set for a strong rebound in 2021, according to DataTrek.
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Despite the ongoing COVID-19 pandemic, S&P 500 profits will likely set a record in 2021, staging the fastest-ever recovery since at least the 1980s, according to a Monday note from DataTrek Research.
Based on data from FactSet, Wall Street is expecting the S&P 500 to earn $168.38 per share in 2021, which would represent 3.9% growth over 2019’s all-time high of $163.02 per share.
The typical recovery time to new highs in corporate profits following a period of economic weakness is three to four years, but this time around, it could just be one year.
Following the dot-com bubble burst of 2000, it wasn’t until the fourth quarter of 2003 that corporate profits reached their record set in early 2000. And after the Great Financial Crisis, it took the S&P 500 4 years to recover all of its earnings power.
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But this time around, it could just be one year for corporations to hit new records in profits.
“Start with a solid base of corporate earnings in Q3 2020, add what we all hope is a highly effective virus vaccine, stir in still-low interest rates and decent consumer spending, and you SHOULD get record high 2021 earnings,” DataTrek co-founder Nicholas Colas explained.
Two factors that will likely drive the swift resurgence in corporate profits are “dramatic earnings leverage in cyclical sectors” and “continued high levels of profitability in sectors that ‘won’ 2020 (tech, mostly),” Colas said.
According to 2021 S&P 500 estimates, revenue growth of 7.8% will translate into earnings growth of 22.1%.
“The only time you can pencil in 14 points of leverage (as the Street is doing now for 2021) is very early in an economic cycle,” Colas highlighted.
“Given all that’s occurred in 2020 it [2021 earnings estimates] could actually be low if revenues recover more strongly and cost containment measures remain in place,” Colas said.
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Meanwhile, technology companies are expected to build off of their strong base established in 2020, with estimates for revenue growth of nearly 8% and earnings growth of more than 14% in 2021.
And while current stock market valuations may seem stretched due to a decline in earnings and the S&P 500 trading at record all-time highs, that’s too be expected during cyclical recoveries, according to the note.
But if an investor doesn’t believe in the potential for corporate profits to stage a strong rebound in 2021, then it’s hard to make an argument for stocks.
“If you don’t believe US corporate earnings can show dramatic operating leverage in 2021 then now is the time to consider lightening up on risk exposure,” Colas concluded.
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