US Companies Achieve Best First Quarter Performance in 10 Years... What Is the Outlook for the Second Half?

[Asia Economy Reporter Song Hwajeong] It has been revealed that U.S. companies recorded record-breaking earnings in the first quarter of this year. Analysts suggest that U.S. companies have passed the recovery phase and have entered a full-fledged earnings growth trend.

According to Korea Investment & Securities on the 5th, S&P 500 companies posted operating profits of $510 billion and net profits of $400 billion in the first quarter of this year, exceeding early April market consensus estimates by 7.7% and 11.6%, respectively. This represents an increase of more than 130% compared to the first quarter of last year and marks the highest quarterly earnings in the past decade.

Min Tae-il, a researcher at Korea Investment & Securities, said, "The growth rate exceeding 100% is partly due to the significant decline in profits caused by the suspension of economic activities in the first and second quarters of last year due to COVID-19, but the absolute figures of this quarter’s earnings, which are significantly higher than pre-COVID levels, cannot be explained solely by the base effect. After the recovery period in the third and fourth quarters of last year, this year marks the beginning of a full-fledged earnings growth phase."

By industry, the retail and IT hardware sectors, which include Amazon and Apple, contributed to the earnings surprise by exceeding market expectations in both operating and net profits. The transportation sector, which includes airlines showing signs of recovery and shipping companies benefiting from rising freight rates, also delivered earnings surprises. On the other hand, healthcare, semiconductor, and utility sectors reported earnings below market expectations.

Supported by the full-fledged earnings growth trend, annual earnings this year are also expected to increase significantly compared to last year. Researcher Min said, "The market currently expects operating profits and net profits to increase by 79% and 99%, respectively, compared to 2020. Following the record-breaking first quarter, it is highly likely that annual earnings will also significantly exceed pre-COVID levels."

The market expects corporate profits to grow further in the second half of the year. Min said, "Quarterly-wise, the second quarter is expected to show slightly lower earnings than the first quarter, but even this will be significantly higher than pre-COVID quarterly earnings levels. The third and fourth quarters are expected to see about a 5% increase in both operating and net profits compared to the previous quarter. If these expectations hold, the third and fourth quarters will consecutively break the record for the highest quarterly earnings set in the first quarter, making it highly likely to set an annual record as well."

The reason for the heightened market expectations for earnings is the anticipated full-scale resumption of economic activities that were halted after COVID-19 in the second half of the year. Currently, COVID-19 vaccinations are progressing smoothly in the U.S., and some economic activities are already resuming accordingly. The earnings consensus for the second to fourth quarters is also on a gradual upward trend, suggesting a high possibility of meeting the market’s elevated earnings expectations.

In the past month, the sectors with the highest increased expectations for second-half earnings are energy and semiconductors. The consensus for these two sectors has been revised upward across the second, third, and fourth quarters. Researcher Min explained, "For the semiconductor sector, an increase in demand for DRAM due to new product launches in the second half and rising server DRAM prices driven by inventory accumulation demand from hyperscaler companies are expected. Along with the semiconductor sector, the energy sector, which is expected to benefit from increased demand during the driving season and improved profitability due to economic normalization, will lead record earnings."

Additionally, the retail sector, which posted strong earnings in the first quarter, has recently seen a significant rise in second-quarter earnings expectations, and industrial sectors such as steel, non-ferrous metals, and lumber have shown notable upward revisions in consensus for the third and fourth quarters. These sectors’ earnings in the second half warrant attention.

On the other hand, the automotive sector’s consensus for the second and third quarters has been sharply revised downward recently. Researcher Min said, "Global automakers have announced production cuts due to expanded supply chain risks such as semiconductor shortages, which are expected to persist until the end of the year. Additionally, the media & education and telecommunications services sectors are showing declining expectations throughout the second half. If the downward trend in consensus continues, these sectors are likely to experience poor earnings."

This content was produced with the assistance of AI translation services.