S&P 500 profit boom breaks post-crisis earnings playbook
Wall Street's 32% surge in forward S&P 500 earnings marks a rare expansion not preceded by a deep forecast recession, raising the stakes for companies to deliver.
Wall Street analysts have pushed their forecasts for S&P 500 profits over the next year to roughly $373 per share, a 32% increase from a year ago. This kind of earnings boom is historically rare. Unlike previous surges, the current expansion was not preceded by a collapse in profit expectations.
Since 1990, forward earnings growth has only been stronger in the aftermath of the global financial crisis and the pandemic. However, the current cycle looks vastly different. As Kevin Gordon, head of macro research and strategy at Schwab Center for Financial Research, noted this week, the prior two booms followed "massive plunges in EPS estimates." During the financial crisis, forward earnings fell about 38%, and they dropped 22% during the pandemic. The dip preceding the current rally was just 6%.
Instead of resetting through collapsing profits, the market corrected strictly through stock prices. During the S&P 500's 25% bear-market slide between January and October 2022, forward earnings per share actually rose about 5%. Analysts' forecasts peaked later and ultimately fell just 6%, pushing the index's forward price-to-earnings ratio down from about 21.5 times earnings to 15.3 times. Equities became significantly cheaper before the profit outlook ever weakened.
The resulting expansion is broad, though uneven. All 11 sectors in the S&P 500 are showing positive forward earnings growth, with eight expanding at double-digit rates. Technology is driving the top line with roughly 82% growth, while the so-called Magnificent Seven are tracking around 44%.
Yet the equal-weight S&P 500 is still posting a robust 21% growth rate. Because this metric gives every company the same influence, it indicates the profit surge reaches well beyond the largest megacaps, even if the biggest companies are pulling the headline number higher.
For equity investors, this represents a fundamentally different test than the last two major earnings cycles. Companies can no longer rely on the easy optics of beating deeply depressed baselines. With earnings season underway and Big Tech results imminent, corporate America must now execute against an already elevated set of expectations.
