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Stocktake: Investors will demand a good earnings season

Analysts lowball estimates so companies can beat them by 5-6 per cent

Wall Street, New York: S&P 500 is up some 33 per cent from February 2020’s pre-pandemic levels. Photograph: Spencer Platt/Getty Images

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Proinsias O'Mahony
Tue Apr 19 2022 - 00:00

US earnings season got under way last week and investors may be unforgiving if companies fail to deliver bumper profits.

The big rally off the March 2020 lows has been built on a “remarkable” earnings recovery, says DataTrek Research. Prior to the pandemic, S&P quarterly earnings averaged $40 a share in 2018-19, but surged to $55 in the most recent quarter – 38 per cent higher than pre-pandemic levels.

Note the S&P 500 is up some 33 per cent from February 2020’s pre-pandemic levels, almost exactly in line with the surge in corporate profits.

Currently, analysts expect earnings of $51.75 per share. In reality, says DataTrek, everyone knows analysts deliberately lowball estimates so companies can beat them by 5-6 per cent, so the “real” estimate is around $54-55 – similar to the last quarter’s record profits.

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Additionally, analysts expect further growth of 9 per cent in coming quarters, pencilling in S&P earnings of $60 per share by the end of 2022.

The takeaway: US earnings must “come in better than the usual 5-6 per cent beat percentages to reassure investors that the path to $60/share in quarterly earnings is still viable”, says DataTrek.

Earnings have “been the engine powering US stocks to new highs over the last two years”, so upcoming reports “will tell us how much is left in the tank”.

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