Q4 US Reporting Season review: earnings turn positive as guidance revised higher

The market data that matters:

Source: Fact Set, Bloomberg Intelligence

What were the key takeaways from the reporting period?

Earnings beat estimates, post a positive result YoY

Coming to the end of US reporting season, US corporates have recorded positive earnings growth across the S&P500 for the first time since Q4 2019. Entering the reporting period, consensus estimates implied EPS would contract by -9.2 per cent, and revenue would contract by -0.6 per cent. Instead, EPS expanded by 2.4 per cent, revenue grew 1.9 per cent, with 78 per cent of companies beating estimates – slightly down on the previous two quarters, but above the long-term average around 72 per cent.

Future profits upgraded as economic outlook improves

Perhaps the greater boon for investors out of the earnings season was an uncharacteristic upgrade in future profits. Earnings expectations continued to increase for Q1, extending the upgrading cycle for company profits that began in the middle of 2020. According to the financial data provider Fact Set, EPS for the next quarter were marked up by approximately 5.0 per cent – the largest jump in EPS estimates for a quarter for the S&P500 since 2002.

Financials and information technology lead the market

The sectoral breakdown for the S&P500 in terms of earnings growth was relatively mixed. Five out of eleven sectors in the index delivered positive earnings growth, while the rest delivered negative growth. The S&P500’s overall earnings beat was underpinned by much better than expected EPS growth in the information technology, materials and financials sector. The financial sector proved the biggest surprise, posting profit growth of 18.4 per cent, over its -9.4 per cent consensus estimate, in large part due to US banks reducing the provisions they’d set aside during the pandemic recession.

Companies underperform market on reporting day

One drawback that emerged during US reporting season was the response in company stock prices on the day of reporting. Bucking the usual trend of outperformance following the publishing of results, the average S&P500 company fell after reporting earnings in Q4 by -0.46 per cent. Interpreted as a sign of how much optimism about the future has been discounted in valuations, the dynamic of falling prices raised the risk that the expected recovery in profits as the global economy rebounds has been priced-in to the market already.

S&P500 higher than before reporting period, but upside momentum is slowing

Investors on balance seem to have been buoyed by the solid reporting period for S&P500 companies, with the index moving higher throughout the earnings season. However, a couple of bursts of volatility, sparked first by the GameStop sage, then, more importantly, by the recent surge in bond yields, has seen upside momentum fade for the S&P500, as the tech-heavy index struggles to reclaim new highs. The trend remains to the upside for the S&P500, with hopes of a recovery in company profits as the US economy recovers keeping traders buying the dips. But with a recent break of the 50-day MA, which coincided with the index’s trendline support, there’s signs of a potential deeper pullback in US stocks.