Earnings growth is expected to slow significantly ahead of the quarter report season for Q4 2021, when U.S. companies’ fourth-quarter earnings are announced.
The Wall Street Journal (WSJ) reported on the 9th (local time) that the earnings growth rate of S&P 500 companies is expected to reach 21.7% in the fourth quarter of last year, citing a fact set research analysis. In other words, a sharp drop in net profit growth is expected for the second consecutive quarter. The net profit ratio of the S&P 500 index soared to 91.1 percent in the second quarter of last year and then fell to 39.8 percent in the third quarter of last year.
Earnings report for Q4 2021 is expected to be another challenge for the New York Stock Exchange, which started lower in the new year due to the U.S. central bank Federal Reserve’s notice of a key rate hike. The S&P 500 index fell 1.87% in the first week of the new year, marking its worst start since 2016.
However, it is expected to take into account that the base effect is decreasing in relation to the slowdown in net profit growth in the fourth quarter.
The reason why net profit growth was high in the second quarter of last year is largely due to a sharp drop in net profit in the second quarter of 2019. The net profit of S&P 500 companies plunged 31.6% in the second quarter of 2019, shortly after the COVID-19 pandemic, leading to a surge in net profit in the second quarter of last year.
On the other hand, in the fourth quarter of 2019, net profit increased (3.8%) for the first time since the COVID-19 pandemic, so it should be considered that the fourth quarter of last year had no significant base effect.
The net profit margin of S&P 500 companies is also expected to fall for the second consecutive quarter. The net profit ratio slowed to 12.9% in the third quarter of last year, the highest since 2008. Net profit ratio is expected to fall to 11.9% in the fourth quarter of last year.
Considering the weakening base effect, a slowdown in net profit growth is inevitable, so investors are expected to pay attention to what they will say about the future business environment of management, not just corporate profits. In particular, it is expected to focus on the impact of Omicron mutations and costs related to rising wages and logistics costs.
The high PER is also a negative factor for the New York Stock Exchange. Last week’s PER of the S&P500 index, which reflects net profit expectations for the next 12 months, recorded 20.7 times. Before the COVID-19 pandemic since 2017, PER of the S&P 500 index was mainly traded at 16-18 times.
If even profit growth falls, the burden on high PER will inevitably increase. The net profit growth rate of S&P 500 companies this year is expected to reach 9.4%, significantly lower than last year’s annual growth rate of 45%.
In particular, IT-related PER is 27.1 times more burdensome. For this reason, the NASDAQ index fell 4.53% last week, the largest weekly drop since February last year. On the other hand, PER of energy and financial stocks is 11.9 times and 15.2 times lower, respectively.