One Step Closer … to Peak Earnings Growth?

In what shaped up to be a very impressive first half of the year for both the economy and stock market, stellar earnings growth has been a key ingredient. Coming off stronger-than-expected S&P 500 earnings growth of 53% (year/year) in the first quarter, second-quarter earnings are currently anticipated to grow by 78%, the highest since 2009. Though less than half of companies have reported, the expected growth rate is already higher than the initial consensus estimate of 65%.

As was also the case in the first quarter, the beat rate—the percentage of companies reporting earnings growth higher than analysts’ estimates—remains quite high at 89%. In a typical quarter (since 1994), 66% of companies beat estimates; and over the past four quarters, the beat rate has been 83%.

In the table below, you can see a sector breakdown for growth this quarter (and into the next full year). Cyclical areas of the market sit atop the earnings leaderboard, including Industrials, Consumer Discretionary, and Energy. Much of that is due to their tighter connection to economic growth; but also “base effects” given their marked struggles in last year’s second quarter, when the economy was shut down.

Earnings strength led by cyclicals

Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 7/26/2021. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

As shown above, the second quarter is expected to represent the peak in the earnings growth rate (although not the level of earnings). As of now, the growth rate is expected to slow to 27% in the third quarter, a noticeable decrease but still strong. Future estimates show a consistent stairstep pattern down, as shown in the chart below.