Two weeks ago, we reported that 85% of companies in the S&P 500 Index (the 500 largest US corporations) had beaten profit expectations so far this earnings season. We were cautious to draw conclusions since at the time just 8% of those 500 companies had reported results. Today, close to 60% of them have reported results and the proportion of those stocks which have beaten profit forecasts has risen to 88%.
This trend of strong beats over expectations by corporate America will mark the highest proportion of earnings beats since this data series started in 2008. And the magnitude of the beats versus expectations are also worth looking at. In short, they are big. The average profit beat versus forecasts is coming in at +17.2% over the mid-point estimate. An average 17.2% beat on estimates would go down as the fourth highest since 2008. To put it more simply, American businesses are performing better than expected this quarter and this outperformance is at its highest rate on record.
This is already translating into the market upgrading its estimates for corporate profit growth for the third quarter of 2021 (remember: there are four earnings seasons per year, each representing one quarter of the year).
This all serves to reiterate a point we have made many times and continue to believe: earnings season thus far seems to contradict the “common wisdom” that equity values are near their peak. If company profits continue to follow the course they are on, then the market still has room to move up. Equity valuations are fundamentally driven by how much profit and cash flow a business is expected to generate over its life. If those estimates are upgraded, valuations should rise too (all else being equal).
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