Look for attention to start to shift from the amazing earnings growth story in the second quarter to increasingly uncertain projections for the third and fourth quarters of 2021.
It’s not an official finish line, mind you, but second quarter earnings season effectively comes to an end in the week ahead. For me the marker is the August 18 earnings report from market and technology sector favorite Nvidia (NVDA) on August 18. The company is projected to report earnings of 85 cents a share for the July quarter, up from 42% in the July quarter of 2020. And I’ll bet that investors and traders are expecting another big surprise from Nvidia too. Why not? The company beat consensus earnings estimates by 20% last quarter and by 16% in the quarter before and by 25% in the quarter before that.
But while there are still companies that will report after Nvidia–Palo Alto Networks (PANW) reports on August 23, for example, and DocuSign (DOCU) on September 2–after Nvidia market attention will increasingly turn to earnings for the third quarter.
Which only makes sense.
Following on from the 82% year over year growth in earnings (projected but 91% of the 500 S&P companies have reported) in the second quarter is a huge challenge.
And earnings projections for the third quarter are extremely uncertain.
As of August 13, Yardeni Research calculated that Wall Street analysts had projected earnings growth of 27.3% for the third quarter. Yardeni’s own forecast called for year over year earnings growth of 34.4%. Neither figure is anything like an earnings collapse. In other context either projection would look extremely strong. But coming after the 82% growth in the second quarter, these figures could be seen as a disappointment.
And, of course, there’s nothing guaranteed about these projections. Growth in the quarter is going to be, probably, strongly affected by economic disruptions cause to the surge in infections from the Delta Variant. No one knows, at this point, how significant, these disruptions will be although the early reports from U.S. airline suggest that fears of the Delta Variant are likely to cause a significant setback to revenue growth in the months ahead. Added to that company after company have signaled disruptions in the global supply chain that are pushing prices up and making doing business harder.
Typically, Wall Street analysts raise their earnings projections as we move further into a quarter. (The third quarter for most companies started on July 1.) This year? No one know and no one knows what the effect of stock prices will be if analysts don’t keep the growth momentum machine humming by raising earnings estimates.
Projections for fourth quarter earnings show a similar drop off in year over year growth rates and a similar disagreement on the dimensions of the drop. Wall Street analysts are looking for year over year earnings growth of 20.3% in the quarter and Yardeni Research is projecting 24.4% growth. I’d note that nether projection includes any real-world data on the economic effects of the Delta Variant.
The rubber really meets the road–at least in earnings projections–in 2022 and 2023. For 2022 Yardeni Research is projecting year over year earnings growth of just 4.9% and Wall Street is projecting earning growth of 9.2%. In 2023 Yardeni sees 7% year over year earnings growth and Wall Street projects 7.5% growth.
The further out these projections go, I’d point out, the less accurate they’re likely to be. But they do, nonetheless, color how investors and trades see stock prices.