In the long run, stock price performance is closely related to profits and how much the investor is willing to pay, and is usually thought of as price-earnings ratio or price-earnings ratio. John Butters, FactSet’s Senior Revenue Analyst, tracks S & P 500’s revenue and revenue forecasts in sector detail and publishes a weekly analysis.
His recent data show that analysts’ earnings growth forecasts have been stalled in the last two weeks. This is not so surprising due to the various economic uncertainties that increased last month and the September quarter financial results announced in October. Analysts tend to wait until it becomes clear what the outcome is and the company provides guidance to better understand the future.
The graph below shows the S & P 500 revenue (black line) and index values (blue line). As you can see in the first third of the chart, stocks are valued at a lower rate than the middle part and have increased since early 2020.
Please note that the increase in EPS that occurred in late 2017 and early 2018 was due to the corporate tax rate being reduced from 35% to 21%.
Revenue growth is stagnant
S & P 500 revenue is expected to grow 42.9% this year, compared to 9.3% in 2022, as shown in the graph below. Profit not only has returned to 2019 levels, but is well above that this year and next year.
- 2017: $ 133.61
- 2018: $ 161.56, up 20.9% (due to tax cuts)
- 2019: $ 163.12, up 1.0%
- 2020: down 13.9% to $ 140.46
- 2021E: $ 200.66, up 42.9%
- 2022E: $ 218.60, up 9.3%
However, in the last two weeks, both 2021 and 2022 forecasts have declined slightly. In the Butters September 10 report, the 2021 and 2022 EPS estimates were $ 201.53 and $ 219.83, respectively. In last Friday’s note, it fell slightly to $ 200.66 and $ 219.32, respectively.
These are very small declines, but represent the first decline since late March. This could be a stall before companies announced their September quarter results and provided guidance for the December quarter.
GDP growth seems to be slowing
After the economy plunged in the June 2020 quarter due to the coronavirus, it recovered strongly in the September 2020 quarter. In the first and second quarters of this year, the Bureau of Economic Analysis estimates that the economy grew by 6.3% and 6.6%, respectively.
According to the latest GDP Now forecast for the September quarter, the economy is growing at 3.7%. And the average consensus of good companies is 5%. It is not surprising to see these estimates diminish, as the delta variants of the coronavirus appear to be affecting the economy.