Finance,Technology are two largest earnings contributors to S&P 500: Zacks Research

Zacks Investment Research expects the favorable revisions trend to accelerate in the coming months as global investors start looking past the pandemic.

The earnings season of the US corporates is in full flow and the investors are waiting to get a clear picture for the way forward. The picture emerging from the Q1 earnings season is one of all-around strength and momentum, even though big slices of the economy are still dealing with the pandemic’s effects.

Zacks Investment Research takes a close look at the Q1 earnings of S&P 500 firms. According to Sheraz Mian, Zacks Research Director, earnings and revenue growth for the 69 per cent of S&P 500 members that have reported Q1 results (343 index members) are tracking above this group’s recent trend, including the pre-pandemic period. But even more importantly, the tone and substance of guidance is favorable, which is helping sustain the favorable revisions trend that has been in place since last Summer.

In the report, “A Positive Earnings Backdrop”, Zacks Research states, “The five Big Tech players as a whole – Apple, Microsoft, Alphabet, Amazon and Facebook – earned $74 billion in earnings in the March quarter on $311.6 billion in revenues. This group’s Q1 earnings and revenues are up +104 per cent and +29 per cent from the year-earlier period, respectively.”

Financial Sector

For the 92.0 per cent of the Finance sector’s market capitalization that have reported Q1 results, total earnings and revenues are up +112.0 per cent and +8.2 per cent, respectively, with 90.9 per cent beating EPS estimates and 75.3 per cent beating top-line estimates. A combination of easy comparisons and unusually strong capital markets business drove the group’s strong results.

Excluding the Finance sector’s strong growth, Q1 earnings growth for the remainder of the companies that have reported results would be up +34.8 per cent (vs. +49.2 per cent) on +10.6 per cent (vs. +11.1 per cent) higher revenues, which is still the strongest growth for this cohort of companies in recent quarters.

Technology sector

For the Technology sector, we now have Q1 results from 79.5 per cent of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Tech companies are up +56.7 per cent from the same period last year on +23.3 per cent higher revenues, with 95.3 per cent of the companies beating EPS estimates and 93.0 per cent beating revenue estimates.

S&P 500 companies

Total earnings for the 343 S&P 500 companies that have reported Q1 results are up +49.2 per cent on +10.6 per cent higher revenues, with 87.5 per cent beating EPS estimates and 78.1 per cent beating revenue estimates. The outsized earnings growth is largely due to very strong numbers from the Finance sector.

Looking at 2021 Q1 as a whole, combining the results that have come out with estimates for the still-to-come companies (the ‘blended’ view), total S&P 500 earnings are now expected to be up +44.1 per cent from the same period last year on +9.1 per cent higher revenues, with a combination of easy comparisons and strong gains in a number of sectors giving us the growth rebound.

The ‘blended’ Q1 total earnings are on track to reach a new all-time quarterly record, thanks to impressive results from Finance and Technology, the two largest earnings contributors to the S&P 500 index. The implied ‘EPS’ for the S&P 500 index, calculated using the current 2021 P/E of 23.5X and index close, as of May 3rd, is $178.61, up from $135.82 in 2020. Using the same methodology, the index ‘EPS’ works out to $200.61 for 2022 (P/E of 20.9X). The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

Zacks Investment Research expects this favorable revision trend to accelerate in the coming months as global investors start looking past the pandemic.