Earnings season heats up

A perspective from E*TRADE Securities 04/29/21

Welcome back to another earnings season, where the weather isn’t the only thing warming up: First quarter results have been on a hot streak, with four out of five S&P 500® companies meeting or beating Street expectations.1 

But with the market clinging to lofty levels, much of the upside may be priced in, and post-earnings stock performance has generally been muted as analysts focus more on forward guidance.

Let’s check in on how the world’s largest companies are faring in a reopening economy—and what their leaders are saying about the future.

The forecast

Roughly 40% of S&P 500 companies had reported as of April 28. According to FactSet estimates, earnings are expected to increase 34% from last year’s first quarter, which would mark the highest growth rate since Q3 2010.2 For perspective, earnings rose 4% last quarter.

To be sure, comparisons to the exceptionally weak earnings of Q1 2020—when the onset of the pandemic crippled many businesses—are largely responsible for this historic increase. Still, the percentage of companies beating earnings estimates (more than 80%), and the degree to which they are outperforming (by more than 20%), are both at record levels.2

Financials, consumer discretionary, and materials are projected to report the highest earnings growth, while industrials and energy are expected to post declines.

Source: FactSet; Based on companies that had reported as of 4/23/21, plus earnings estimates for those yet to report.

The highlights

To date, results have been concentrated in financials, consumer staples, and industrials. Here are some themes that have emerged from the tape:

  • Big banks: The major US banks kicked off earnings season in what has become familiar fashion—beating estimates and reporting strong trading revenues. Financial leaders were bullish on the economy, forecasting a surge in consumer and business spending.3 Another sign of optimism: Significantly smaller stockpiles for loan defaults.
  • Consumer giants: Coca Cola and Pepsi both topped headline numbers but cautioned that recoveries in international markets have been uneven.4,5 Reports were mixed elsewhere: Procter & Gamble posted solid results as consumers added beauty products to carts in addition to pandemic staples like cleaning supplies.6 Kimberly-Clark, however, missed expectations and lowered its full-year outlook, warning it would be hiking prices to offset rising commodity costs.7 Coca Cola and P&G are also planning to raise prices to combat higher commodity costs.
  • Airlines: Airline earnings continue to drag down the industrials sector (estimated 18% decline), which would otherwise be poised for earnings growth.2 While air travel is still a fraction of what it was pre-pandemic, the major carriers revealed that bookings are recovering: American and Southwest are ramping up flights ahead of the summer season, and some airlines, including American, United, Spirit, and JetBlue, plan to resume hiring pilots this year.8
  • Big tech: Alphabet, Microsoft, Apple, and Facebook all posted huge quarters, easily beating estimates as strong advertising and product sales helped boost revenues. Guidance from the tech giants ranged from positive (Microsoft upped its revenue forecast9), to cautious (Facebook noted growth may stall in the second half of the year10), to non-existent (Apple once again held off on providing any official outlook11).

E*TRADE customers can log on to their accounts and view the market calendar (Markets & Ideas > US Markets > Market Calendar) for an up-to-date earnings schedule. 

Investing themes

Despite strong earnings thus far, the market appears to be reacting coolly amid already lofty valuations and record highs for the major stock indexes. For investors trying to digest the flurry of reports in the weeks ahead, here are a few considerations: 

  • Don’t ignore guidance: This season is a great reminder that what business leaders say about the future can often influence stock prices just as much as—if not more than—the results themselves.
  • Take a pulse check: Earnings season is a good time to get a read on the financial health of companies—and more generally, sectors—especially when the broad market is hovering at record levels. Investors may want to look at the underlying business metrics of the companies in their portfolios and consider their potential to grow or provide consistent value.
  • It's lumpy playing field: Analysts expect earnings to grow 55% in Q2 and 20% in Q3.2 When looking for investing opportunities, consider what areas of the market may be attractively priced—some segments may be more expensive than others relative to earnings growth.

Finally, keep in mind that a stock’s immediate reaction to earnings news—good or bad—isn’t necessarily a reliable predictor of its longer-term direction. Earnings season is consistently punctuated by dramatic knee-jerk reactions that can quickly reverse course. Stay focused on individual timelines, long-term goals, and risk tolerance.

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  1. Bloomberg, “Tech Weighs on Stocks Ahead of Megacap Earnings: Markets Wrap,” 4/26/21, https://www.bloomberg.com/news/articles/2021-04-26/asia-stocks-set-for-muted-open-ahead-of-fomc-markets-wrap?sref=ANhy9MmA
  2. FactSet Earnings Insight, April 23, 2021, https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_042321B.pdf
  3. The New York Times, “With Earnings Soaring, Wall Street Banks See Economic Boom Ahead,” 4/14/21, https://www.nytimes.com/2021/04/14/business/wall-street-banks-earnings.html
  4. CNBC, “Coca-Cola beats on earnings, says demand in March hit pre-pandemic levels,” 4/19/21, https://www.cnbc.com/2021/04/19/coca-cola-ko-q1-2021-earnings.html
  5. CNBC, “PepsiCo revenue rises 6.8% despite unbalanced economic recovery outside of the U.S.” 4/15/21, https://www.cnbc.com/2021/04/15/pepsico-pep-q1-2021-earnings.html
  6. CNBC, “Procter & Gamble earnings beat as consumers hang on to pandemic cleaning habits; price hikes ahead,” 4/20/21, https://www.cnbc.com/2021/04/20/procter-gamble-pg-q3-2021-earnings.html
  7. Barron’s, “Kimberly-Clark Stock Falls on Downbeat Earnings and Weaker Outlook,” 4/23/21, https://www.barrons.com/articles/kimberly-clark-stock-earnings-guidance-51619184025
  8. CNBC, “American and Southwest report stronger bookings, ramp up schedules ahead of summer,” 4/22/21, https://www.cnbc.com/2021/04/22/southwest-airlines-luv-and-american-airlines-aal.html
  9. CNBC, “Microsoft books biggest revenue growth since 2018,” 4/27/21, https://www.cnbc.com/2021/04/27/microsoft-msft-earnings-q3-2021.html
  10. Bloomberg, “Facebook’s Sales, Users Jump as Pandemic Habits Persist,” 4/28/21, https://www.bloomberg.com/news/articles/2021-04-28/facebook-s-sales-users-jump-as-gains-during-pandemic-persist?srnd=premium&sref=ANhy9MmA
  11. CNBC, “Apple reports another blowout quarter with sales up 54%, authorizes $90 billion in share buybacks,” 4/28/21, https://www.cnbc.com/2021/04/28/apple-aapl-earnings-q2-2021.html

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