Corporate earnings season is the roughly six-week time period when the majority of U.S. companies release their financial results for the prior quarter. For most companies, this will be the January-March first quarter. The fundamental driver of a company’s stock price is its ability to generate revenues and profits. Thus, each company’s profits, sales and revenues, among other data, are brutally dissected by Wall Street to justify the current price of the company’s stock.
As of Thursday, 439 of the companies within the S&P 500 index have reported their first-quarter earnings. The S&P 500 is the benchmark stock index for the 500 largest U.S. corporations. According to financial tracking provider Refinitiv, 87% have reported better-than-expected earnings, on pace for the highest rate on record dating back to 1994. On average, corporate earnings have increased by 51.2% over the past 12 months, more than double the April 1 forecast of just 24.2%.
Of the 11 sectors that make up the U.S. economy, the Consumer Discretionary sector has reported the highest 12-month earnings growth rate. This sector consists of non-essential products, including cars, apparel and leisure and hospitality goods and services. To date, first-quarter earnings for Consumer Discretionary companies have soared 188.8%. Rounding out the Top 5 are Financials (+137.8%), Materials (+62.2%), Communication Services (+50.1%) and Technology (+43.6%). The Industrials sector, which includes manufacturing and construction companies, currently ranks 11th, in last place, with earnings growth of just 0.7%.
The first quarter’s surge in corporate earnings has been driven by the vaccine-fueled reopening of America’s economy. Despite the record-setting pace of corporate earnings, the stock market’s response remains fairly subdued. Since April 13, the S&P 500 index has gained just 1.4% while the tech-heavy NASDAQ has actually lost 2.6%. So, why the fairly underwhelming response from Wall Street?
The first quarter’s growth needs to be placed in perspective. The current 51.2% 12-month growth rate has a very low base of comparison. In the first quarter of 2020, corporate earnings cratered as governments around the world shuttered their economies in response to the COVID-19 pandemic.
There are also concerns of rising inflation — the year-over-year increase in consumer prices. Wall Street fears higher prices will eventually reduce consumer appetite for spending. Moreover, ongoing disruptions to global supply chains — causing shortages of components critical to America’s manufacturing recovery — have dampened the outlook for future revenue growth. Case in point is Ford Motor Company.
On April 28, Ford reported first-quarter earnings of $0.89 per share, blowing away Wall Street’s forecast of $0.15 per share. Ford reported $33.6 billion in automotive revenues, above estimates of $32.38 billion. Despite its stellar first-quarter performance, the next day, Ford’s stock fell 9.4%. Ford’s stock selloff illustrates the impact of the global shortage of semiconductors. This shortage of computer chips will cause Ford to lose almost 50% of its scheduled production in the second quarter and another 10% in the second half of 2021. In total, Ford will lose an estimated 1.1 million units in production this year.
By all accounts, the U.S. economy is expected to remain quite robust the remainder of 2021 — a seemingly perfect environment for stock prices. But rising inflation, global supply chain issues and a surge in COVID-19 cases in parts of the world pose tremendous risks to the future earnings of U.S. corporations. With risk comes uncertainty. And for investors, this uncertainty could make for a very volatile year in the U.S. stock market.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
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