Consensus expected corporate profits in the US to rise 20% YoY during the first quarter. Instead, they rose 46% (figure below).
With 90% of the S&P 500 on the books, the pace of beats remained torrid. 68% of firms beat consensus by more than one standard deviation, a record high.
Goldman called Q1’s results “stellar.”
And yet, the market remains circumspect. It’s not “What have you done for me lately?” It’s “What are you going to do for me this quarter and next?”
Normally, an earnings beat is good for 100bps of outperformance the following day. This reporting season, the reward for beats was just half that, in keeping with a trend from 2020.
“Similarly, while S&P 500 Q1 EPS came in 20% above expectations, analyst estimates for Q2-Q4 2021 and 2022 have been revised up by less than 5%,” Goldman’s David Kostin wrote late Friday, noting that the bank is more optimistic.
Kostin raised his 2021 EPS forecast to $193, citing Q1’s blockbuster results and a generally upbeat outlook for the rest of this year. Goldman also lifted their 2022 estimate (figure below).
At the macro level, it’s all about the expected economic renaissance in the US. “The combination of global reopening, elevated consumer savings, and strong corporate operating leverage will drive sharp recoveries in both economic and earnings growth,” Kostin said.
Under the hood, the bank’s upward revision to this year’s EPS forecast is driven by financials and tech, which together comprised half of Q1’s index-level beat. Financials, Goldman wrote, “benefited in large part from the release of $10 billion in reserves.” That isn’t a sustainable earnings driver, but apparently, only a third of the pandemic reserve build has been released so far, leaving a little gas left in that particular tank.
As for tech (and this is crucial), margins hit a record during the first quarter, and that had a knock-on effect for the index. As Kostin wrote, “tech’s growing share of S&P 500 revenues have helped lift S&P 500 profit margins back to the Q3 2018 record high of 11.6%.” The bank sees margins posting an all-time high of 11.5% for the full year.
Clearly, margins face a number of headwinds going forward, from rising input costs to wage pressure to tax reform. “Rising input costs represent a key risk to our margin forecast,” Kostin said.
Note that Goldman’s outlook isn’t all roses. The bank noted that while their earnings outlook for this year is $4 above bottom-up consensus, 2022’s outlook is $7 below it due to “expectations of higher corporate tax rates next year.”
Further, Kostin wrote that in Goldman’s view, a trio of factors will inhibit any additional valuation expansion in 2021. He cited “decelerating US growth, a real rate-driven rise in interest rates, and the likely passage of tax reform.”
The bank sees no multiple expansion through 2022 and Kostin’s year-end targets for this year and next are unchanged at 4,300 and 4,600, respectively.