Americas CIO View

First-quarter S&P 500 EPS will likely beat estimates: Market priced for 10% or more

Consensus first-quarter S&P 500 EPS is 39.75 U.S. dollars, same as suggested by DWS profit indicator

Bottom-up consensus first-quarter S&P 500 earnings per share (EPS) is 39.75 U.S. dollars. Our profit indicator, which consists of six macro indicators – Manufacturing ISM[1], Industrial Production, Exports, Initial Jobless Claims, Loan Growth and Oil Prices – suggests 18% quarter-over-quarter sequential growth from trailing four-quarter EPS. This suggests first quarter 2021 EPS of 39.50 U.S. dollars, in line with the bottom-up consensus.

However, our profit indicator does not include retail spending or direct links to housing. It captures more of the manufacturing and global side of the S&P 500 than its consumer and domestic side. In past cycles, non-financial S&P 500 EPS was most sensitive to manufacturing. Yet, consumer spending, especially on services, is the most cyclical this time. Moreover, our indicator’s connections are loose to the digital drivers of S&P 500 profits from Tech and Communications, which have ballooned in profit share. Thus, it is more an old economy profit indicator than new. Knowing this, we have turned to company reports from digital firms to better estimate near-term S&P EPS. Still robust digital trends suggest upside to indicator figures, so does recovering consumer spending, robust capital markets, rising long-term yields and weaker U.S. dollar vs. past four quarters.

We expect three to four U.S. dollars beat this earnings season and first-quarter EPS to finish at 43 to 44 U.S. dollars

Despite seasonality, analysts are too conservative with first-quarter 2021 S&P 500 EPS three U.S. dollars below fourth-quarter 2020 EPS given strong sequential first quarter U.S. gross-domestic-product (GDP) growth and encouraging corporate comments. Looking at estimates by sector, several seem too low. For Consumer Discretionary, first-quarter 2021 earnings are expected to be 20% or 5.3 billion U.S. dollars lower than fourth quarter 2020. Too low, despite seasonality, given re-openings, job gains, high 2020 end household savings/net worth and the post holidays stimulus checks. Consumer Discretionary should beat by 10%-15% adding 0.50-1.00 U.S. dollars to first-quarter S&P 500 EPS. Energy first-quarter consensus is also too low. West Texas Intermediate (WTI) averaged 57 U.S. dollars in the first quarter of 2021, similar to most quarters in 2018 and 2019 when quarterly Energy earnings were 12-15 billion U.S. dollars. The 6.6 billion U.S. dollars consensus is low and actual results could add about one U.S. dollar to S&P 500 first-quarter EPS. Financials first quarter should be only slightly lower than fourth quarter 2020 with less loan loss reserve release and probably weaker capital-market activities, but helped by rising interest rates. Financials could give 0.50-1 U.S. dollar upside to first quarter 2021 S&P 500 EPS. Tech and Communications seem reasonable sequentially, but they have been beating very strongly and Tech equipment and much of Communications should benefit from recovery. These two sectors are big earners and could beat by 5%-10% and add one to two U.S. dollars to first-quarter EPS. Other sectors look reasonable and should deliver usual small beats. Overall, we expect a near 10% beat or three to four U.S. dollars in first-quarter reporting, such that first-quarter 2021 S&P 500 EPS finishes at 43-44 U.S. dollars.

Risks to a near 10% beat exist, a normal mere 3%-5% beat could trigger a sell-off

However, some factors point to a first-quarter S&P 500 EPS being below fourth quarter 2020 and the beats reverting to the long-term norm of a bit over 3%; far from the amazing 15% plus beats in the past three quarters. These risks include that Europe's recovery is much weaker so far than the U.S. bad February weather throughout much of the United States staved some consumption and caused supply disruptions. While monthly survey indicators like the Manufacturing ISM stayed strong, actual measures of industrial and manufacturing production were softer. Also, the Mfg. ISM indicated higher prices due to supply chain challenges and disruptions. This could drag on industrial, auto and other goods producer profits. If the trend of amazing beats is broken this season with an aggregate beat of only 5% or less, it could trigger a 5%-10% stock-market dip. However, if amazing beats and powerful upward earnings estimate revision trends continue during first-quarter reporting, we could see the S&P 500 climb to 4,100 this spring.

Our 175 U.S. dollars 2021E S&P 500 EPS has 5-10 U.S. dollars of upside depending on first-quarter indications

If first-quarter EPS finishes at 44 U.S. dollars or higher, it would put 185 U.S. dollars within reach for 2021. This 10 U.S. dollar upside to our current 175 U.S. dollar estimate is mostly at Tech, Communication Services, Financials, and Consumer Discretionary. Less so at Industrials and Energy remains oil-price dependent. We will revisit our new estimates during first-quarter reporting. In our view, 2022 S&P 500 EPS will likely be 195-205 U.S. dollars, a 5%-8% mid-cycle S&P 500 EPS growth, in absence of a corporate tax hike.

What's priced in: continuing superior growth sectors and perfect recovery at recovering sectors

When we look at multiples on our 2021 and 2022 estimated EPS, the S&P 500 is trading at 22.7x and 20.8x. For the growth-y sectors, Tech is trading at 26.6x and 24.6x, and Communication Services 23.6x and 21.5x respectively. If these sectors maintain superior long-term earnings growth prospect, they can justify such multiples. And for the recovering cyclical sectors, Consumer Discretionary is trading at 35.9x and 30.7x, and 27.3x and 23.8x even ex. Auto and Internet Retailing. Energy multiples 31.5x and 21.4x, and Industrials 27.6x and 23.8x. These sectors are expected to recover to their profits above their pre-Covid peaks by 2022 and at a lofty multiples on those profits. We find multiples at Health Care still attractive on its healthy earnings growth and Financials also cheap as rising interest rates and lower loan loss provisions help improve Banks earnings, also Utilities' valuation still attractive on its rich dividend yield as long as interest rates do not surge.


1. Institute of Supply Management


All opinions and claims are based upon data on 4/1/21 and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment Management Americas Inc.

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