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Q1 US reporting season: big growth in EPS tipped as economic recovery unfolds

Market participants have their eyes set on what’s shaping as a very strong Q1 earnings season.

Source: Bloomgberg

When is US reporting season?

US Reporting Season has begun, and will extend to the end of May.

The market data that matters:

Source: Bloomberg Intelligence

EPS Growth Expected (YoY)

Revenue Growth Expected (YoY)

Current Price-to-Earnings

Est. FY1 Price-to-earnings

Current Dividend Yield






What is the market expecting out of this earnings season?

After 12-months reeling from the effects of the COVID-19 pandemic and the subsequent global recession, US earnings for the first quarter is expected to put on display the economic recovery unfolding in the US and broader global economy.

Helped by the base effects of a big contraction in profits in the corresponding quarter last year, Bloomberg Intelligence suggests the consensus EPS growth estimate for the quarter is a robust 18.6 per cent, with revenue growth for the quarter tipped to come in at 6.3 per cent.

What are the key themes to watch out of earnings season?

1. How do corporates see fiscal stimulus and the economic outlook?

On aggregate, the markets will be assessing how US corporates see the economic outlook, especially as fiscal stimulus continues to be pumped into the economy, and the country’s rapid vaccine rollout supports it’s gradual re-opening. Markets are positioned for a big cyclical upswing in the US economy, with analysts expecting that ought to feed into robust earnings growth throughout 2021.

While the markets will home-in on the upside risks from a recovering economy, there’ll also be interest in some of the potential downside risks that comes with a potentially booming economy. Specifically, commentary about building inflationary pressures will be watched out for, and whether corporates are experiencing higher input costs that could lead to price increases in the future.

2. Can the earnings upgrade cycle continue?

As the global economy progressively recovers from the COVID-19 recession, market participants will attempt to crystallize a more accurate picture of the profit cycle. Estimates for future earnings growth continues to be upgraded, with aggregate EPS growth for Q1 over the past quarter, according to financial data company FactSet, being increased by a historically high 6 per cent.

While the outlook is likely to remain bullish, as the global economy progresses through its recovery phase, a key issue will be whether profit upgrading cycle is set to continue, or whether it may in fact now plateau, as market participants fully discount the recovery.

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3. Which sectors will lead and lag the market?

A major thematic in global markets over the past quarter has been the rotation into value stocks – those set to benefit from an uplift in the economic cycle – and away from defensive and growth stocks. Reflecting that dynamic, earnings growth this quarter across the S&P500 is expected to be led by those value names, with the financials, materials and consumer discretionary sectors expected to lead the market.

Indicative of the unevenness of the economic rebound, the expected laggards in term of EPS also fall into the value or cyclical category: the energy sector is tipped to deliver the biggest earnings contraction for the quarter, while industrial stocks are also tipped to deliver relatively weak earnings, despite an improving US economy.

4. How big a hit to bank profits will the Archegos collapse have?

A developing and slightly niche story for the US stock market in the final weeks of the quarter was the spectacular collapse of the Archegos Capital Management family office. Although its broader market implications proved relatively limited, with no major systemic risk seemingly revealed, the collapse did result in some hefty losses for several major global banks, with US banks Goldman Sachs and Morgan Stanley deeply involved.

With the big banks kicking off earnings season, market participants will be looking to quantify the exact losses the exposed banks have sustained from the collapse, as well as getting a clearer picture of how these banks risk controls failed so miserably.

How could this earnings season impact the S&P500?

As investors discount the reopening of the global economy and roaring economic recovery, the US 500 continues to clock-up fresh record highs. Enabled by reflation hopes and very accommodative fiscal and monetary policy, the S&P500 has recently extended beyond the 4000 level for the first time in its history.

Of course, the markets will be looking for corporates to exceed the consensus EPS estimate and deliver a healthy beat-to-miss ratio, while also providing positive guidance or the quarters ahead.

The technicals currently suggest that perhaps the S&P500 is becoming slightly overbought at current levels, with trendline resistance close to being tested, and the daily RSI closing in on a 70 reading. However, this is all occurring within a broader primary uptrend, with traders likely to use any pullback in the S&P500 as an opportunity to “buy-the-dip”.

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Source: Trading View

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