Earnings Growth Supports Strong Equity Market Advance

Fourth quarter 2020 earnings reports are nearing an end as 495 companies in the S&P 500 Index have reported results. Refinitiv's report dated March 5, 2020 notes results have come in better than history. Nearly 80% of companies have reported earnings above analyst estimates, exceeding the long-term average of 65%. Expectations for the next two quarters shows earnings growth accelerating with the second quarter 2021 estimate currently indicating growth of 51.2% on a year over year basis.

The below chart shows the 12-month forward earnings growth estimate along with the S&P 500 Index. The strong earnings recovery supports a similar recovery in the S&P 500 Index. S&P earnings for calendar year 2021 are estimated to equal $174 versus $141 in 2020. The earnings expectation for calendar year 2022 is now over the $200 threshold at $201. 

It does seem by some measures the equity market is priced for perfection. With the strong and steady recovery in earnings in this still low interest rate environment though, stocks should continue to deliver acceptable returns. The equity market does not move higher in a straight line, so market volatility should be expected though.