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‘An important tailwind for the market’: Morning Brief

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Thursday, March 25, 2021

History says to expect more bullish upward revisions to earnings estimates

Wall Street still can’t keep up with the economy.

On Tuesday, RBC Capital Markets’ top U.S. equity strategist Lori Calvasina joined the chorus of top equity strategists already boosting their 2021 earnings forecast for the S&P 500 (^GSPC).

“We have raised our S&P 500 EPS forecast from $168 to $177 for 2021, and from $186 to $193 for 2022,” she wrote. “The biggest change from our last update in late January is on GDP, where our economics team anticipates real GDP growth of 6.6% in 2021 and 4% in 2022.”

Outside of what seems to be largely a weather driven slowdown in February, economic data has been surprising to the upside. And with COVID-19 vaccines getting distributed and economic stimulus being unleashed, it wouldn’t be too surprising to see good news about the economy continue.

However, Credit Suisse’s Jonathan Golub believes his fellow Wall Street equity strategists may still be far too cautious in their revenue and earnings forecasts for the S&P, considering where the economy may be headed.

“Our work shows that every 1% change in GDP drives a 21⁄2–3% change in revenues, and even larger improvements in profits,” Golub wrote in a note to clients on Tuesday, noting that economists are currently forecasting 7.8% nominal GDP growth for 2021.

He included this chart to illustrate the relationship.

“2021 revenues are forecasted to grow 9.6%,” he said. “However, based on the relationship shown above, economic forecasts imply 14% revenue upside [(2.7*Nominal GDP of 7.8%) – 7.2% = 14.0%]. If these predictions are even directionally correct, S&P 500 revenue and earnings estimates are far too low.”

One thing many have learned in the past year is that it’s incredibly difficult to make any forecasts with much accuracy during extreme economic shocks. Importantly, things don’t happen very gradually.

In fact, it was just a year ago that Golub said S&P 500 EPS for 2020 could plummet to about $143, even as the consensus was estimating a decline to about $161. According to FactSet, it looks like he was remarkably close with actual EPS coming in at around $140.

The fact that we are still arguably early in this economic cycle bodes well for Golub’s bullish observations.

“Historically there are two distinct patterns of estimate revisions: improvement in the early stages of a recovery and steady decline during the mid- and late-cycle years (2018 was an exception due to tax changes),” he wrote. “In each of the past two recovery periods, the trend of positive revisions lasted 2-3 years, providing an important tailwind for the market.”

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today


  • 8:30 a.m. ET: Initial jobless claims, week ended March 20 (730,000 expected, 770,000 during prior week)

  • 8:30 a.m. ET: Continuing jobless claims, week ended March 13 (4.000 million expected; 4.124 million during prior week)

  • 8:30 a.m. ET: GDP annualized quarter-over-quarter, 4Q third print (4.1% expected, 4.1% in prior print)

  • 8:30 a.m. ET: Personal consumption, 4Q third print (2.4% expected, 2.4% in prior print)

  • 8:30 a.m. ET: Core PCE quarter-over-quarter, 4Q third print (1.4% expected, 1.4% in prior print)

  • 11:00 a.m. ET: Kansas City Fed Manufacturing Activity, March (26 expected, 24 in February)


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