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Charting the Market: Previewing a Pivotal Q1 Earnings Season

By:

Head of SPDR Americas Research

  • Expectations are high for the first earnings season on the road to recovery; can firms deliver?
  • Global equities have rallied for 5 consecutive months. Will this earnings season stall the rally or help extend it?

The 2021 first quarter earnings season will provide an updated glimpse into how firms around the world are navigating the recovery and the reopening of economies. After all, this will be the first quarter of earnings data covering a time period simultaneously featuring more broad-based vaccine distributions and the relaxation of certain capacity restrictions.

The results are also occurring at a time where global equities have rallied for five consecutive months, and broad-based valuations are seemingly stretched relative to historical levels (97th percentile).1 And while the broad market has rallied, certain segments at the sector level have rallied more than others based on their relationships to the macro factors propelling this rally (e.g., cyclicals and rates).

Combine these factors together and it is a pivotal earnings season. If growth disappoints, the rally may stall. If growth follows the latest sentiment, then the rally could be extended. In this month’s Charting the Market, global earnings trends will be analyzed ahead of results being released, providing insights into what to expect for the first earnings season on the road to recovery.

Sentiment is positive with upgrades made globally

In the US, over the last few months, analysts have upgraded first quarter earnings-per-share (EPS) growth expectations for S&P 500® firms by the largest margin ever, boosting estimates by 6%. This is in stark contrast to the historical analyst revision trends in the preceding months to the first quarter earnings season, as expectations have historically declined as shown below.
 
S&P 500 Change in Quarterly Estimates in Prior 3 Months (%)

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1Based on the MSCI ACWI Index price-to-earnings ratio, 1995-2021 per FactSet data, as of April 1, 2021.

Glossary

Earnings Per Share (EPS)
A profitability measure that is calculated by dividing a company’s net income by the number of shares outstanding.

MSCI EAFE Index
A free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the US and Canada.

MSCI Emerging Markets Index
A free-float-adjusted market-capitalization-weighted index that is designed to measure large- and mid-cap equity market performance of emerging markets.

Price-to-Earnings Ratio (P/E)
A fundamental ratio comparing the current price of a stock to the earnings-per-share of the firm

S&P Kensho New Economies Composite Index
The index is designed to capture companies whose products and services are driving innovation and transforming the global economy through the use of existing and emerging technologies, and rapid developments in robotics, automation, artificial intelligence, connectedness and processing power (“New Economies companies”).

S&P 500 Index
A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.

S&P 500 Growth Index
A market-capitalization-weighted index developed by Standard and Poor’s consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics.

S&P 500 Value Index
A market-capitalization-weighted index developed by Standard and Poor’s consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics.

S&P SmallCap 600® Index
The S&P SmallCap 600 seeks to measure the small-cap segment of the US equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

Originally Posted on April 9, 2021 – Charting the Market: Previewing a Pivotal Q1 Earnings Season

Disclosures

The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Investments in small-sized companies may involve greater risks than in those of larger, better known companies.

Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.

Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Because of their narrow focus, sector funds tend to be more volatile.

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