Everyone knew earnings were going to be good, but this is really good.

“There’s evidence every day that growth is clearly improving around the world, today from the US to Australia,” Ed Hyman, chairman and head of the economic research team at Evercore ISI, said in a note to clients.

You can see it in a string of recent economic reports. Everything is stronger than consensus estimates: from March retail sales to weekly initial jobless claims (lowest since March 2020) to April’s Empire and Philadelphia Fed manufacturing reports.

And, most importantly, you can see it in the early crop of earnings reports.

To date, 34 companies in the S&P 500 have reported first-quarter earnings. Of those, 88% have beaten their 1Q 2021 EPS estimates by an average of 22%, according to the Earnings Scout.

Traders have been expecting significant upside to earnings, but this is even stronger than those expectations. Companies on the whole usually report earnings above analyst consensus, but not by 22%. Prior to 2020, the historic average beats were in the 3%-6% range.

What happened? “When the companies withdrew their guidance in 2020, the analysts went very conservative,” Nick Raich, who tracks corporate profits at Earnings Scout, told me.

Some of the early reporters have beaten by even wider margins:

Analysts underestimate earnings
(% Q1 beat above consensus)

USBancorp 49%
JPMorgan 48%
Bank of America 25%
Citigroup 28%
UnitedHealth 17%
Pepsi 8%

Will these huge earnings beats continue? Don’t bet on it, Raich tells me.

“Analysts cannot see the future. The reason they are so far off is that with no clues from the companies, they get very conservative,” he said. “As companies give more guidance and the pandemic recedes, you will see the analyst estimates start to narrow.”

Still, that is not a reason to be pessimistic. What matters for stocks is earnings estimates for future quarters, and here there is also good news.

“The majority of the companies that have reported are seeing their second quarter estimates raised, which is very positive” for stocks, Raich said.

Some have expressed concerns about higher material costs. Several food companies have recently reported higher costs, and some are trying to raise prices. That could impact profit margins.

“Given our view that further upside in the S&P 500 this year must be supported by greater than expected EPS growth, we’ll be keeping a close eye on what companies are saying about margin tailwinds and headwinds in the weeks ahead,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a recent report.

Still, most are coming to believe that higher costs are either temporary or companies will be able to successfully pass them on so they won’t impact profits.

Regardless, Raich said, earnings estimates are continuing to rise, and that is what matters. “If you are going to be bearish, earnings are not the reason. Earnings are sending a very positive signal.”

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