January 19, 2021
EARNINGS RECESSION IS LIKELY OVER
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Ryan Detrick, CMT, Chief Market Strategist, LPL Financial
This earnings season likely will be the last of the earnings recession. After year-over-year declines in the first three quarters of 2020, the fourth quarter likely will make it four in a row. Looking ahead, earnings are likely to grow solidly in the first quarter 2021 and throughout the year, which we think will enable stocks to grow into their lofty valuations.
EXPECT MODEST EARNINGS DECLINE
We expect solid upside to S&P 500 corporate earnings relative to current estimates. However, expecting a year-over-year increase may be too much to ask. Consensus is calling for a roughly 8.5% year-over-year decline in earnings per share (EPS) according to FactSet’s estimates [FIGURE 1].
We expect earnings to surprise to the upside by a solid margin again this quarter for a number of reasons.
Higher estimates. Estimates for the fourth quarter have risen by about 2.3% since October 1, 2020, which signals companies, will be able to deliver at least the typical several percentage points of upside. Estimates typically decline by about 4% during a quarter.
Guidance has been very positive. A very high 66% of companies that provided guidance during the fourth quarter guided numbers higher. That percentage is significantly higher than the five-year average of 33%.