So far in earnings season, companies are reporting numbers way above what Wall Street expected

A trader works on the floor of the New York Stock Exchange.

NYSE

Everyone knew the earnings would be good, but that’s really good.

“There are signs every day that global growth is improving significantly, from the US to Australia today,” said Ed Hyman, chairman and head of the economic research team at Evercore ISI, in a message to customers.

You can see it in a number of recent economic reports. Anything is stronger than consensus estimates: from retail sales in March to weekly initial jobless claims (lowest since March 2020) to the Empire and Philadelphia Fed manufacturing reports in April.

And most importantly, you can see it in the early harvest of earnings reports.

So far, 34 S&P 500 companies have reported first quarter profits. According to the earnings scout, 88% exceeded their EPS estimates for the first quarter of 2021 by an average of 22%.

Traders expected a significant uptrend in earnings, but it is even stronger than expected. Companies typically report earnings that are above analyst consensus, but not by 22%. Before 2020, the historical average beats were in the range of 3% to 6%.

What happened? “When companies withdrew their forecast in 2020, analysts were very conservative,” said Nick Raich, who tracks corporate earnings at Earnings Scout.

Some of the early reporters hit even more:

Analysts underestimate the result
(% Q1 above consensus)

USBancorp 49%
JPMorgan 48%
Bank of America 25%
Citigroup 28%
UnitedHealth 17%
Pepsi 8%

How long will these amazing earnings last?

Will these huge wins continue? Don’t bet on it, says Raich.

“Analysts can’t see the future. The reason they’re so far away is because without any guidance from companies, they get very conservative,” he said. “As companies give more guidance and the pandemic recedes, analysts’ estimates will gradually narrow.”

However, this is no reason to be pessimistic. What’s important for stocks is earnings estimates for future quarters, and there’s good news here, too.

“The majority of the companies that have reported see their estimates for the second quarter raised, which is very positive,” said Raich.

Some have raised concerns about higher material costs. Several food companies recently reported higher costs, and some are trying to raise prices. This could have an impact on profit margins.

“Given our belief that the continued upward trend of the S&P 500 this year needs to be supported by stronger-than-expected EPS growth, we will be watching closely what companies say about margin tailwinds and headwinds in the coming weeks,” he said Lori Calvasina. In a recent report, he said, head of US equity strategy at RBC Capital Markets.

Still, most believe that higher costs are either temporary or that companies can successfully pass them on so they don’t affect profits.

Regardless, Raich said, earnings estimates keep rising, and that’s what matters. “If you are going to be bearish, the profits are not. The earnings send a very positive signal.”

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