The clocks turned back over the weekend, which signals we are in the middle of a beautiful fall season and winter is not far away.
Another season, earnings season, is also well underway with roughly 90% of S&P 500 companies reporting results. More companies are reporting revenue beats than average and by a wider margin than average. As I suggested in prior emails, this above-average growth rate is the result of a combination of higher revenues for 2021, but also easier comparisons to weaker revenues during the height of the pandemic.
As shown in the chart below, Q2/2021 revenue was up over 25% compared with Q2/2020, and Q3/2021 (the current quarter) is estimated to be up over 17% compared with Q3/2020. (Both Q2 and Q3 2020 quarters showed revenue declines compared with 2019.)
And while some companies reported negative impacts resulting from supply-chain issues and inflation in the current quarter, many companies are still reporting significantly higher revenues and earnings compared with 2019.
By focusing less on revenue and earnings during the pandemic and more on the trajectory of S&P 500 revenues and earnings (past and future), it is easy to understand why the market continues to hit all-time highs. As shown in the chart below, 2019 S&P 500 earnings per share were roughly $162 per share, with 2020 earnings falling due to the pandemic. Estimates for earnings in 2021 are projected be above $200 per share, climbing to almost $250 per share during calendar year 2023. That is impressive growth! And as corporate profits grow, so too can the markets follow along.
This rosy picture should not suggest we will not see market pullbacks and maybe even a correction in the coming months or year. As I have said in the past, market pullbacks (down 5-10% from recent highs) occur roughly 3 times per year, and full-blown corrections (down 10-20%) occur on average once per year.
So investors should not be surprised to see periods of increased volatility at times, particularly around geo-political headlines. But if those headlines are not likely to lead to negative impacts on corporate earnings, then ignoring the day-to-day market gyrations should prove easier.
If you have questions or would like to chat, please let me know.
Cheers!
