The S&P 500’s Earnings Surprising Upsurge

The S&P 500 (^GSPC) is currently experiencing an earnings surge, defying expectations of a typical revenue decline.

Analysts predict the S&P 500 will make around $373 per share in the next year, which is a significant increase of about 32% compared to last year.

This figure is quite unusual.

Since 1990, stronger growth in future earnings has only been noted following the global financial crisis and the COVID-19 pandemic. However, during those times, Wall Street had recently revised its profit forecasts downwards.

But, this time, that’s not the case.

Earnings per share, or EPS, refers to the portion of a company’s profit allocated to each outstanding share. The forward-looking 12-month EPS utilizes analysts’ estimates for the upcoming year rather than relying on past results.

Kevin Gordon, who oversees macro research and strategy at the Schwab Center for Financial Research, pointed out that while the strongest growth since 1990 appeared only after major downturns, those periods were marked by significant drops in EPS expectations.

The data supports his observations.

Before and after the financial crisis, S&P 500 futures profits plummeted by roughly 38%, and during the pandemic, by about 22%. In contrast, prior to the current economic upturn, the decrease was only about 6%.

The market is undergoing a reset. Instead of profits collapsing, the adjustments have primarily reflected in stock prices.

During the bear market from January to October 2022, when the S&P 500 saw a 25% decline, future EPS estimates actually rose by approximately 5%. This forecast peaked and ultimately dropped by just 6%.

When you look at the forward price-to-earnings ratio—comparing current stock prices with expected earnings—it’s around 21.5 times earnings compared to 15.3 times. This suggests that stock prices were noticeably lower before the outlook for earnings took a significant hit.

This current boom isn’t confined to just a few sectors. All 11 sectors in the S&P 500 project positive future earnings growth, with eight sectors showing double-digit growth.

Still, the growth isn’t evenly distributed.

Technology, for instance, leads with an impressive 82% growth rate, fueled partly by the chip sector’s remarkable profits. The “Magnificent Seven” stocks have surged roughly 44%, while the S&P 500 index has increased about 21%.

This means that, although the mega-cap stocks are performing well, the broader market is also seeing gains beyond just these major companies.

That raises some intriguing challenges for investors.

The last two economic booms relied on unexpected rebounds, a scenario that seems unlikely this time around.

As we approach earnings season, particularly with major Technology firms set to report their results, those companies will need to meet Wall Street’s high expectations for continued growth.