Don’t let record S&P 500 earnings growth deceive you

Earnings season is about to begin and analysts are forecasting a big jump in US company earnings.

• Companies in the S&P 500 are expected to report a 64% growth — up from 53% in the first quarter.
• Compared to the past 5 years, the S&P 500’s average quarterly growth rate is only 4.1%.

What’s the big deal? This increase would be the biggest since the 2008-2009 financial crisis. But don’t be fooled by the headlines — earnings are only growing so much since they fell that much during 2020. And many stocks in the S&P 500 are already trading at record highs:

• Expectations of a big rise in earnings were a key reason for this year’s stock price increases, according to Jonathan Golub of Credit Suisse (via FT).
• We could be at peak levels of growth, according to Rupert Thompson of Kingswood Group (via FT).

During the previous earnings season, industries most impacted by COVID reported the biggest earnings increases (i.e. energy, industrials, consumer discretionary and financials). And this time, don’t expect it to be any different.

Behind these positive headlines is another warning for the economy: the extra economic boost from a surge in spending may be over sooner than expected.

Investors: Don’t take this news as a sign that stocks will rise on earnings…

• Stock prices tend to rise the most on earnings results if they exceed expectations.
• With expectations so high, it’ll only become more difficult for companies to beat them.

Now that earnings are finally returning to normal levels, expect lower growth rates and a  tamer market.

Also: What happens to the stock market after a big year of returns?