This article is written exclusively for Investing.com
Earnings season is approaching, and it could be a significant season for the overall stock market given the number of stocks that have risen in recent weeks. Since March 25, it has risen almost in a straight line by almost 8%. You have to think that part of this increase has been driven by the expectation that the earnings season will be a strong one.
Revenues are now estimated to be approximately $ 173.53 in 2021, up from $ 163.59 on December 31, an increase of approximately 6%. Over the same time, estimates for 2022 have increased from $ 191.46 to $ 199.46, an increase of about 4.2%. With rising earnings expectations moving into this quarter's results, earnings will need to be much better than expected for the estimates to rise further and keep the S&P 500 higher.
Expectations decline over time
Historically, it is not common for income estimates to continue to rise. In fact, earnings expectations have started higher since 2010, but only lower in many cases. This is because the expectations of analysts and investors were generally too high. Although this time may be different due to the reopening of the economy due to lockdowns, due to the corona virus. One has to wonder if that will be the case for 2022 and even 2023.
S&P Earnings Estimates
The years 2010 and 2011 could be most similar to which earnings are now experiencing coming out of the recession of 2008 to 2009. Earnings expectations in those two years started low and could get higher. But from 2012 to 2016, the opposite was true, with earnings estimates starting high and ending the year at much lower levels.
The only recent exception was in 2018, where earnings expectations rose and remained higher as corporate taxes were lowered and the US economy improved. That was a year-long anomaly, however, as 2019 went back to the same starting high and ending low outcome as in the rest of the decade, with expectations declining throughout the year.
Will Repeat History
Even as earnings expectations rise dramatically for this year and next year, they are still well below what investors initially hoped for. Before the pandemic, analysts' earnings expectations for 2021 were $ 205 per share, while earnings expectations for 2022 were estimated at more than $ 214 per share. So while the estimates are much lower than what they were at one time before the pandemic, those same estimates have gotten higher again.
Valuations are high
But the higher the earnings expectations rise, the higher the expectations. It means there will be continued pressure on earnings to come in even better than expected to push those estimates to even higher levels.
S&P PE
It may be even more critical this year as the S&P 500 is currently trading at 20.7 times its expected one-year earnings expectations. This is the highest ratio of the S&P 500 PE since the late 1990s. It means that there is very little room for error during this earnings reporting period.
Therefore, these first quarter results may be more critical than in the past, especially if investors are hoping to prevent stock market bullish momentum from diminishing rapidly.
