Where Are Earnings Actually Growing Versus 2019?

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Where Are Earnings Actually Growing Versus 2019?

Published on 8/16/21

Two Data topics today:

#1: We talk a lot about how the S&P 500 in 2021 is handily out earning its 2019 pre-pandemic self, but exactly which sectors are driving that and how sustainable is it? As a reminder:

  • In 2019 the S&P 500 earned $157/share according to S&P. This is close enough to FactSet’s $163/share which we often cite that we won’t quibble about the difference.
  • In Q1 2021 the S&P 500 earned $47/share according to S&P ($49/share according to FactSet), which annualizes to $188/share ($196/share from FactSet). That means the index was earning 20 percent more than 2019 (S&P and FactSet numbers agree on that percentage gain).
  • Both Wall Street and S&P analysts expect the rest of 2021 to continue to show 20 – 30 percent earnings growth versus 2019.

We looked at S&P’s sector earnings estimates to identify which industries are creating these large 2021 comps to 2019. Here is what we found:

  • In terms of which sectors drove the positive Q1 2021 comps to 2019, it is a pretty broad list.

    Financials earned 36 percent more in Q1 2019 than their average 2019 earnings per share. Health Care (+34 pct vs. 2019), Tech (+34 pct), Materials (+37 pct), Utilities (+18 pct) and Communication Services (+50 pct) were also strong. Consumer Discretionary and Staples were even with their 2019 earnings, while Energy (83 pct of 2019), Industrials (65 pct) and Real Estate (85 pct) were the laggards.
  • The story changes considerably when we look at expectations for 2H 2021 earnings, because just 3 heavyweight groups are slated to show outsized comps to 2H 2019.

    Expectations for Tech sector earnings in 2H 2021 are 60 percent higher than 2H 2019 actual results. Health Care’s expected 2H 2019 – 2021 comp is +50 pct, and Communication Services’ is +40 pct (mostly due to Facebook and Google).

    Two smaller groups – Energy and Materials – are expected to show 80 – 90 percent positive 2H 2021 comps to 2H 2019.

    For the rest of the sectors in the S&P – Consumer Discretionary and Staples, Financials, Industrials, Utilities and Real Estate – 2H 2021 earnings will be within 10 percent of what they were in 2H 2021.

Takeaway (1): It’s not that the entire S&P 500 is making more in 2H 2021 than 2H 2019. Rather, it is that Tech (plus Google and Facebook) and Health Care, with a little help from Energy and Materials, is making substantially higher net profits than pre-pandemic. Six of the S&P’s 11 sectors are not expected to show any 2H 2019 – 2021 earnings growth.

Takeaway (2): We continue to like large cap Tech, Health Care and Energy – 3 of the 4 groups helping to power overall S&P profit growth.

#2: Whenever the S&P has a significant down open (admittedly, not very common lately) we look at what Fidelity’s retail traders are doing in the first trading hour of the day. This data is available on the company’s website and shows how many “Buy” and “Sell” orders have been placed so far that day.

As of 10:30 am this morning, here were the names with the largest Buy/Sell ratios on Fidelity’s 25-most-traded names list and their intraday losses from Friday’s close.

  • Tesla (down 5 pct at 1030am): 1.9x more Buys than Sells
  • Moderna (-10 pct): 1.6x
  • AMC (-1 pct): 2.6x
  • Amazon (-2 pct): 2.8x
  • SoFi (- 4 pct): 4.1x
  • ContextLogic (-10 pct): 1.7x
  • NVIDIA (-3 pct): 1.7x
  • Palantir (-4 pct): 1.5x
  • Gamestop (-1 pct): 3.1x

By 4pm, 7 of these 9 names were noticeably (+1-5 pct) higher than they were at 1030 am; only SoFi and ContextLogic failed to reward the morning’s dip buyers, and even they just hovered near their 1030 am levels.

Takeaway: the presence of a new raft of “buy the dip” retail investors may well be one reason we’ve not seen the usual August US equity market volatility. This morning’s news flow had all the makings of a one percent-plus down day: a slowing Chinese economy, a sudden drop in oil prices, lower Treasury yields, and a Tech sector selloff. Things didn’t turn out that way. And, as long as buying a discounted open is a popular retail trader strategy, US equities may continue to do what they did today: grind their way slightly higher.