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Are analysts setting expectations too high?

Earnings estimates can be a useful proxy for corporate profits which investors use as a gauge for expected returns and valuation analysis.  Current estimates for 2021 anticipate the S&P 500 earnings per share to recover all the lost ground from 2020 and getting back above the record high set in 2019. 

NDR Earnings Estimates for 2021.png
NDR S&P EPS by Year.png

Based on the current economic recovery, this seems like an unlikely outcome. 

Historically, when capacity utilization declines by the amount experienced in the second quarter of 2020, earnings stay negative for 12-18 months. 

Source: Hedgeye.

Source: Hedgeye.

The decline in output activity in the second quarter was the largest in the history of this dataset going back to 1967.  The recovery from the lows may come faster than normal given the unique nature of this recession.  However, it seems aggressive to assume that production can get to 2019 levels given the differences in unemployment and order activity between then and now.

NDR Durable Goods Y-Y.png
Source: FRED.

Source: FRED.

Another key driver of the record earnings per share number in 2019 was share buybacks.  This helped lower the overall share count and contributed to the faster growth in per share profits compared to overall net income.

Source: Blackstone.

Source: Blackstone.

Many companies have announced a halt or reduction in buyback activity, and banks have been prevented from doing so due to concerns over near term capital needs. This lack of support will increase the hurdle rate needed to meet the 2021 earnings per share estimates.

Reductions in earnings estimates have historically been a negative contributor to forward equity returns.  Current 2021 estimates appear to be out of line with the current pace of the economic recovery and historical data post-recession.  This may lead to a large negative reduction in earnings expectations (above the normal reduction), which may cause equity markets to decline as valuations are adjusted and return expectations are reset.


Rank Dawson, CFA
Vice President, Research Strategy
Boyd Watterson Asset Management, LLC


The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.