🔔 Barriers To Earnings Growth

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Handing over to The Veteran for his take on the positive earnings growth seen in 2021 so far, and the potential barriers for that growth to continue... 👇

We are in the final stages of the Q3 earnings season in the USA and by and large, the reports have been positive.

And, the numbers from major US corporates make for good reading.

81% of those companies that have reported have beaten their EPS estimates with an average positive surprise of +12.20% whilst YoY EPS growth is averaging +38.60%.

Revenues are also surprising on the upside.

75% of reporting companies have beaten their revenue estimates with an average surprise of +2.10% and YoY growth rates of +14.90%.

Good as those numbers are they are down on the same point during Q2 earnings when 91% of companies had beaten EPS estimates with an average positive surprise of +17.80% and YoY growth above 87.0% 👇

The tables above give a flavour of how the earnings landscape looks at this point in  Q3 compared to the midpoint during Q2 earnings.

What’s immediately obvious from looking at the data is that aside from the Energy sector EPS growth rates have slowed dramatically.

Take the industrial sector for example. In Q2 the sector was enjoying EPS growth of +477.70%.

This time around (Q3) that figure has fallen to just +89.20%.

I say just but probably shouldn’t. Growth rates above 80% a quarter would be in most CEOs’ dreams if they hadn't been almost 6 times higher in the prior period.

Which of course, raises the question of sustainability and what the barriers to earnings and earnings growth might be going forward...

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We can see what analysts think the issues will be from these charts which show the evolution of their forecasts for S&P 500 revenue and earnings growth from 2017.

2022 forecasts are in blue:

Revenue growth is expected to flatline and earnings growth is thought likely to decline sharply.

Why?

Well, analysis by Bloomberg recorded more than 3000 mentions of the phrase supply chain in the earnings calls of S&P 500 companies whilst FactSet research found that 71% of the S&P 500 companies had mentioned the negative impact that supply chain issues were having when it checked the temperature back in Mid October.

Other negative factors included labour shortages, rising costs and legacy impacts of Covid 19.

Some of these changes and challenges may already be impacting sales growth across various S&P 500 sectors: Consumer Discretionary, Financials and Real Estate all saw negative sales in Q3 compared to Q2

We have also seen operating margins decline in certain sectors such as Materials, Consumer Discretionary and Staples and indeed the S&P 500 index as a whole.

Those declines can likely be attributed to rising costs or inflation.

PPI or factory-gate inflation seems to be tracking overall measures of rising prices in the USA right now as we can see below.

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Is it right to chase the market higher if earnings and revenue growth have already peaked?

Price has already run well ahead of EPS forecasts for the next 12 months and the S&P 500 is trading on elevated multiples that are well above the 5 and 10-year averages.

Perhaps the final word should be left to Factset who note that:

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