By 19 November, nearly 95% of S&P 500 companies had already published their 2021 Q3 results. At USD53.75 in Q3, S&P 500 EPS set a new quarterly record. Despite the doubts that emerged in September, these results managed to significantly beat expectations once again. At the last check, they showed growth of +42%, well above what was expected at the start of the earnings season on 1 October (+29%). They are all the more impressive as they also show a sharp increase in relation to Q3 2019 (+33%), a period that was not impacted by Covid. Despite this upswing in Q3, the consensus for Q4 has remained stable overall (+22%, as on 1 October), leading therefore to just a modest upward revision to the consensus for the full year (+49% for 2021 vs. +46% on 1 October). What’s more, this limited upward revision for 2021 is to the detriment of 2022, for which the consensus forecast has been revised down from +9.2% to +7.7% since 1 October.
While the consensus of sell side analysts usually tends to be overly optimistic, this time we feel it is rather conservative. True, the peak of the recovery is behind us and comparison bases next year will be much more difficult. Similarly, wage pressures and higher input costs will impact results. Nevertheless, companies that have pricing power should be able to neutralise a significant proportion of inflation. In particular, if US GDP growth is largely above 3% next year (Amundi’s central scenario is +3.7%), EPS growth of only +7.7% would be unusual as it would be scarcely higher than average EPS growth over the long term for much higher GDP. In fact, between 2000 and 2019, S&P 500 GDP and EPS rose by an average of +2.1% and 6.9% respectively per year. But since one additional point of GDP would lead to an additional 6% of EPS, all other things being equal, with +3.7% growth in US GDP expected next year, S&P 500 EPS would be expected to increase by +16%, which is twice the consensus estimate (+7.7%). In the end, to maintain a margin of security given the unforeseeable nature of the pandemic, the bottlenecks and the ability to pass on price increases, we feel a midway increase in US EPS of around 10% next year is realistic.
The growth in earnings by sector is also instructive. While all major sectors showed growth, the levels varied considerably. Over the full year, the three sectors with the highest EPS growth were energy (+1461% in 2021e), materials (+89%) and manufacturing (+88%). Concerning energy and manufacturing, in addition to the recovery, they enjoyed an easy comparison base after a heavy fall in their results last year. For materials, however, which showed very good resilience in 2020, the sector’s sharp growth this year is primarily thanks to the surge in commodity prices. In bottom position, unsurprisingly, are defensive sectors such as utilities (+4%) and consumer staples (+10%); the beverages and food retailer segments continue to be penalised.
Over two years (2019-2021), then, to compare with the situation before the pandemic, the six sectors for which EPS growth should be higher than average (+30% for the S&P) are :materials (+78%), IT (+50%), energy (+44%), communication services (+39%), healthcare (+38%) and financials (+35%). With the exception of healthcare, underpinned by the health situation, these sectors are mainly cyclical, linked to commodities or to Gafam (IT & communication services) or are benefiting from the improvement in the general economic outlook, such as financials. On the other hand, defensive sectors such as consumer staples (+14%) and utilities (+5%) remain well below the average. Finally, by contrast with the other cyclical sectors, manufacturing (-17%), which is being penalised by the bottlenecks and the rise in commodity prices, is still a long way from its 2019 level.