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US companies looking forward to seeing their strongest profit growth in nearly 20 years

It is April of 2021 which means that the estimates for quarterly earning growths by analysts and experts of major companies are on their way. However, these projections have come bearing good news this time with the expected quarterly growth of US companies to be at its strongest in more than 2 decades, which, as we would discuss would mean the economic path to accelerated recovery not only in the United States but also around the world. Analysts in their expectations of the coming quarter’s profit have penned down the United Sates’ economy’s acceleration out of the recession that the country witnessed due to the imposition of lockdown amidst the COVID19 pandemic and a global slowdown eventually. Projections for substantial earnings growth in the energy sector have also made rounds with the estimates of earnings expected to reach more than double.

By being headquarters to some of the largest U.S. brokerages and investment banks, the Wall Street is expected to witness a boom in financial reports as we approach the middle of April. It is also reported that some of the major investment banks namely J.P. Morgan Chase, Goldman Sachs and Wells Fargo would be among the companies that are expected to kick off first-quarter earnings for the financial year 21-22. The Wall Street analysts are confidently looking ahead to the S&P 500 companies overall to post a 6% increase in bottom-up per-share earnings, as per data revealed by FactSet. The S&P 500 companies include the largest U.S. Publicly traded companies as per a weighted average of the company’s market capitalisation adjusted by the number of shares available for trading. Some famous of these include Microsoft, Apple, Alphabet Inc. and Amazon among others, with these companies expected to post an overall 6 per cent increase in bottom-up per-share earnings. The bottom-up Earnings per Share estimate is an aggregation of the median first-quarter per-share earnings estimate for all of the companies in the S&P 500, FactSet said in a note published earlier this Thursday. Goldman Sachs has also predicted a profit rebound pattern for a number of companies that were the worst impacted by the pandemic, indicating signals of recovery not only in the upper sections but also overall.

To understand the extent of how significant this number is, note that a 6 per cent rise would represent the largest increase in the index since the financial firm first started tracking the earnings estimate, which tracebacks to almost two decades ago to the second quarter of 2002.  Earnings, on average, are currently expected to come in at $39.86 per share. One of the more prominent reasons for the standing out of this 6 per cent increase is the fact that bottom-up Earning per Share estimate usually decreases during a quarter, as opposed to the current significant increase. “During the past five years, the estimate has recorded a decline of 4.2% during a quarter, and during the past 15 years, it has tended to post a decrease of 5.1%,” as mentioned by FactSet.

What could be the reason behind the boost in these first-quarter projections, you ask? Well, let’s understand this with a bit of the back story. After the novel Coronavirus pandemic forced businesses worldwide to shut operations, the global economy’s recession brought along contractions for a large number of world economies. The US economy contracted by a whopping 33 per cent in the second quarter of 2020. However, the third quarter of 2020 brought along expectations of rising earnings for that quarter and beyond, with analysts at FactSet predicting a gross domestic product expansion rate of 4 per cent as of December 31. The predictions were later revised to be 5.7 per cent in accordance with the performance of the country in the three beginning months of 2021. “Analysts may have been too aggressive in their downward revisions to EPS estimates during the first half of 2020 at the height of the COVID-19 lockdowns,” wrote John Butters, senior earnings analyst at FactSet, in looking at the factors behind the boost in first-quarter projections.

Another factor driving up this upward revision in projections is the sharply rising commodity prices and interest rates, which again are signs of an economy accelerating out of recession. Oil prices have jumped by more than 20% to top $59 a barrel during the first quarter and the yield on the 10-year Treasury note quickly scaled up above 1.7% during the first three months of this year from 0.92%. The highest percentage increases in bottom-up EPS estimates are for the energy, materials, and financials sectors as they are “likely benefitting from either higher commodity prices (Energy and Materials) or higher interest rates (Financials),” said Butters.

Let’s just say we’re about to witness a mounting image of the financial sector with a collective increase expected of about 13 per cent for the first quarter. Per-share earnings estimates for the energy sector have also shot up by 123%, to $2.55 from $1.14, the largest boost in projections among the 11 sectors tracked on the S&P 500 index. “Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal,” said Butters, noting that 61 companies have issued positive first-quarter guidance, well above the five-year average of 35. “If 61 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006,” he said.

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