Investors have reason to expect another strong earnings season

US earnings season is underway. JP Morgan, Citigroup and BlackRock were among the few S&P 500 companies to report earnings last week but 40 companies report this week, with another 99 following next week.

A strong season is a given. Annual earnings growth of 22 per cent is expected, although the actual numbers should be higher again. On average, companies beat earnings by around five percentage points, says LPL Research, making earnings growth of around 27 per cent a “reasonable target”.

The extent of the earnings beat in the last quarter suggests even that may be an underestimate, it says, resulting in 30 per cent earnings growth.

Not everything is sunny. For the first time since the second quarter of 2020, more companies are issuing negative quarterly guidance than positive guidance. That’s not cause for alarm. DataTrek Research notes only around a fifth of companies ever pre-announce earnings and the current ratio of negative-to-positive pre-announcers is in line with long-term norms.

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Still, it shows that after 2021’s enormous earnings rebound, we are now returning to pre-pandemic patterns.

Although markets roared higher in 2021, surging earnings mean the S&P 500’s forward price-earnings ratio is actually lower today than a year ago. Still, valuations remain well above long-term norms, so investors may be unsettled by anything less than another bumper earnings season.