- The US Q2 earnings season has been positive, as it has generally shown positive earnings surprise (by 17%) as well as strong earnings growth (by 93.7% QoQ).
- Earnings are also becoming more broad-based, with all sectors showing positive earnings growth, and all but one sector (utilities) showing double-digit earnings growth.
- When comparing to previous bear markets in history, as well as with other DMs in the present, we also find that this earnings season has performed favourably.
- Macro outlook remains strong, but valuations are a major concern – there may be some frontloading of estimates.
- Overall, we are positive on US growth, but think that much of this positivity has already been priced in.
Majority of the US companies are beating estimates
Sales and earnings growth remain robust
Chart 1: Q2 earnings performance has remained strong in Q1 and Q2
Broad-based growth across multiple sectors
Chart 2: Earnings surprises are more balanced in Q2
Earnings have recovered well compared to previous bear markets
- The recent recovery in EPS has been swift (taking about 2 quarters to reach pre-crisis levels), similar to the GFC and faster than the Dotcom Bubble.
- The decline in EPS as a result of COVID, was not as severe as the decline observed during the GFC (but still sharper than the Dotcom Bubble, which lasted for a longer period).
- EPS has continued to increase sharply above pre-COVID levels. In comparison, we only saw a moderate increase in EPS after the Dotcom Bubble and GFC.
Chart 3: EPS has recovered better versus previous bear markets
Earnings remain supported
Elevated P/E ratio limits upside potential
- negative catalysts emerge along the way, with the main issue being tapering. The Fed has to tread very carefully with its unwinding of asset purchases, as well as potential rate hikes after – a policy misstep may trigger another ‘taper tantrum’ we witnessed in 2013;
- earnings fail to materialise in line with optimistic market expectations. Equities may re-price lower, if subsequent quarters of earnings show considerably slowing of earnings momentum.
Chart 4: S&P500 P/E ratios
Conclusion: Earnings are good, but much has already been priced in
Chart 5: S&P500 Price Performance and EPS
Table 1: S&P500 Projection 2021 - 2023
| US S&P500 Index | FY20 | FY21 | FY22 | FY23 |
| PE Ratio (X) | 27.0 | 22.3 | 20.5 | 18.7 |
| Expected Earnings Growth YoY | -15% | 46% | 9% | 10% |
| Earnings Per Share (EPS) | 139 | 203 | 221 | 243 |
| Projected
Fair Price (based on fair P/E Ratio of 20.0X) |
- | - | - | 4,850 |
| Potential Upside from Today (%) | - | - | - | 7% |
| Source: Bloomberg Finance L.P., iFAST estimates. Data as of 3 Sep 2021. | ||||
Table 2: Recommended product(s) for US equities
| Unit Trust | ETF | |
| USA | JPMorgan Funds - US Small Cap Growth A (dist) USD Wells Fargo US Large Cap Growth Fund Cl A Acc USD |
Vanguard S&P 500 ETF |
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