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Corporate Earnings Continue to Dazzle in 2021, But What’s Next?

Estimates for the coming two years pale compared to 2021’s fireworks.
By Larry Light

You think William Shatner had a great ride? Corporate earnings are expected to post a biggest-on-record 2021, with a 43.9% advance, according to Yardeni Research and Refinitiv’s analyst consensus. For the two years after that, profits are anticipated to slow down some, although analysts predict they’ll reach the high single digits (9.6% for 2022 and 7.1% for 2023). Still, that’s hardly shabby.  

The Star Trek star blasted into space aboard Jeff Bezos’ spacecraft Wednesday, just as the first batch of third quarter earnings statements was released. Thus far, the profits news seems encouraging.

Analysts expect the September-ending quarter to rise 26.5%—not as strong as the second quarter showing of 88.5%, but still pretty good. And John Butters, senior earnings analyst at FactSet, notes that over the past five years, actual S&P 500 company earnings have topped estimated profits by 8.4% on average. If so, that would mean that 2021’s third quarter could exceed 30%, versus the comparable quarter last year. If that happens, he writes in a report, “it would mark the third straight quarter of (year-over-year) earnings growth above 30%.”

This year’s earnings far eclipse last year’s. In annus horribilis 2020, every quarter was negative when compared with the matching 2019 period, according to FactSet research.

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Lest some believe that this year’s profit increases look better than they are, due to flattering comparisons with a pandemic-induced 2020 shrinkage, think again. In dollar terms, 2021’s first half showings are at record highs with as-reported earnings per share (EPS) of $45.95 for the first quarter and $48.39 in the second.

In 2019, EPS hovered around $35 quarterly. That collapsed to the teens at the start of 2020 and then inched north for the rest of the year, ending with a fourth quarter 2020 result of $31.44. In fact, if you compare the EPS for this year’s first two quarters with their counterparts in 2019, 2021’s first quarter is 31.2% higher and the second is ahead 38.5%.

But the less-sanguine S&P 500 outlook for the future has some grounding in current not-so-lovely realities: the ongoing pandemic, supply snafus, China tensions, climbing wages, and inflation. And all this could spell compressed margins for US large-cap companies, i.e., the S&P 500. That’s the take of Savita Subramanian, equity and quant strategist at Bank of America Securities, who in a research note writes that the third quarter has a “near-record number of profit warnings,” the third highest since 2011. “We see big risks to 2022 numbers,” she adds.

Meanwhile, at the outset of the latest earnings reports at least, things look pretty good. Bank earnings were a tonic for the stock market Thursday, with the S&P 500 up by 1.7% (also helped by lower-than-expected jobless claims).

Look at Subramanian’s employer: Bank of America shares rose some 4.5% in Thursday trading—with the bank’s EPS jumping 85 cents, besting estimates of 71 cents, as reported revenue reached $22.8 billion, above projections for $21.8 billion. Helping BofA, as well as other lenders, was its release of $1.1 billion in cash reserves, stashed away to absorb bad credits during last year’s recession. 

“We reported strong results as the economy continued to improve and our businesses regained the organic customer growth momentum we saw before the pandemic,” company CEO Brian Moynihan said in a statement.

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Home > Economy > How Badly Do Rising Prices and Slowing Economic Growth Harm Stocks?

How Badly Do Rising Prices and Slowing Economic Growth Harm Stocks?

It’s not pretty: History shows that this bad combo pares equities’ median returns by 2%, Goldman says.

By Larry Light


Inflation continues to come in hot, and economic growth is decelerating. That’s the formula for stagflation. What would happen if this scenario gets locked in?

Nothing good, according to Goldman Sachs researchers. Over the past 60 years, the firm says in a report, the S&P 500 lost 2.1% when stagflation arrived, versus an almost identical positive number when the phenomenon was absent.

While the Wall Street firm emphasizes that we are not on the brink of a stagflation reprise—it contends that inflation should ebb next year and gross domestic product (GDP) growth resume—the report indicates that examining the scenario, just in case, makes sense.

Inflation has been elevated for several months now. The latest Consumer Price Index (CPI) report showed a 5.4% jump in September, year over year. That is the biggest annual gain since 2008.

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Supply-chain bottlenecks and labor shortages are pumping up producers’ costs, and many of those got passed along at least in part to consumers. The heightened inflation has also led to a major lift in Social Security benefits, which are linked to consumer prices. Starting in January, the program’s monthly payouts will rise 5.9%, a significant departure from the average annual increase of 1.65% that has prevailed over the past 10 years.

It’s standard wisdom that a little inflation is good for stocks, as it betokens a growing economy, which spells fattened earnings, equities’ fuel. When inflation is twinned with a dipping GDP, however, stocks historically pull back. That’s been true of late: From the early September S&P 500 peak, the index has slid 3.6%.

Since 1960, the Goldman report says, there have been 41 quarters it characterizes as stagflationary, concentrated in the 1970s and early 1980s, before the Federal Reserve brought double-digit CPI hikes under control.

After that, stagflation intervals have been brief. The last two were right before the 2008 financial crisis, when burgeoning housing defaults were troubling the economy, but other forces—particularly huge oil prices—kept the CPI up. Goldman defines a stagflation quarter as one where real (i.e., inflation-adjusted) GDP is 0.5 percentage point below trend and the CPI is 0.5 point above trend.

If stagflation persists, Goldman recommends investing in companies with the leeway to raise prices, as they obviously will be the most able to weather the storm.

“If inflation remains high alongside a weakening economic growth outlook, firms with strong pricing power should be best positioned to maintain profit margins despite slowing revenue growth and rising input costs,” Goldman head of U.S. equity strategy David Kostin writes in the report.

Like what, for instance? Goldman screened the large-cap Russell 1000 to pinpoint names whose market appreciation outpaced others this past summer by 15 percentage points. These chosen stocks also sported gross margins that have trended upward.

On its list are biotech company Edwards Lifesciences, tobacco giant Philip Morris International, oilfield services outfit Schlumberger, footwear maker Skechers, and software provider Adobe.

All that said, Goldman has a mildly optimistic outlook for the near term. Inflation will peak in the next few months, the firm believes. Also, it thinks the S&P 500 will finish the year at 4,700. From Wednesday’s close, that would mean an advance of 7.7%.

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