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Large U.S. corporations are expected to reveal a huge rise in profits during the second quarter earnings season, underscoring the scale of the recovery of U.S. corporate fortunes from the depths of the pandemic.
The groups listed in the blue chip S&P 500 index recorded year-on-year earnings per share growth of almost 63% over the three months to the end of June, after an increase of 52.5% on first quarter of 2021, according to FactSet data. If second-quarter data match Wall Street expectations, it would mean the largest increase since the immediate wake of the 2008-09 financial crisis.
The earnings season, which kicks off this week with big banks like JPMorgan Chase, Bank of America and Citigroup, reporting their financial results, will take on special significance as the S&P 500 trades on the brink of record highs after meeting is almost 16% since the beginning of this year.
The earnings recovery forecast, after a deep profit recession during the first three quarters of last year caused by the coronavirus crisis, is expected to be led by banks and other economically sensitive groups, Jonathan Golub said , Credit Suisse’s US equity strategist.
The shares of these “cyclical” companies have performed well this year, as investors expect the world’s largest economy to grow vigorously after falling production by 3.5% last year. .
Energy stocks, which have benefited from a rise in commodity prices, led this year, with an S&P 500 index that has topped the sector by more than a third this year. Financials, a group that includes banks, has increased by about a fifth since the end of 2020.
Golub added that expectations of a large increase in profits have been one of the key reasons for the rise in stock prices this year. This has meant that, although the S&P 500 has jumped to an all-time high, key valuation measures have remained largely stable. Currently, the index is priced at 21.6 times the expected profits over the next year, compared to 22.16 at the end of December, according to FactSet data.
Still, Rupert Thompson, investment director of the Kingswood group, sounded a cautionary note.
“I think we are at the peak of absolute levels of growth,” he said. “I’m not saying it will turn negative, but the idea that earnings will continue to be as big a support as they’ve had over the last six months to a year [is dubious]”.
Geir Lode of Federated Hermes echoed this sentiment, warning that the profit season represented a “potential hindrance” for markets, which “can be challenging for many companies as they struggle to meet expectations. so high after a strong first quarter “.
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