Technology’s Expected EPS Growth In 2021: Stocks Do Fine But PE Compresses


In the weekly “This Week in Earnings” Refinitiv publishes expected, full-year, growth rates for next year on a weekly basis.

As of the end of November, IBES data by Refinitiv is expecting the Tech sector to grow EPS 15% next year, and as the above graph shows, a slow but expected decline has been occurring in the Tech sector’s expected EPS growth over the last 6 months. (That decline is not unusual.)

Here is another way of looking at similar sector by quarter:

Tech Sector Weekly Change

Tech Sector Weekly Change

Looking at the left-hand columns from Refinitiv, the expected tech sector EPS growth in January ’20 (not shown) was roughly 10%, so the sector has recovered nearly 60% of what was expected at the start of the year. For 2021, the initial estimates were looking for 17% expected growth so—as of today—the expected 14% growth for next year has almost closed the COVID-19 gap.

The columns on the right of the above spreadsheet show the week-to-week change in estimates by quarter, which gives more granularity than the annual outlook.

Q3 ’20 “actual” Tech sector earnings were 880 basis points better than what was expected on Oct 1 ’20.

For Q2 ’20, Tech sector earnings were 1,300–1,400 basis points better than what was expected on July 1 ’20, so we could probably expect a healthy “upside surprise” in Q4 ’20 beginning mid-January ’21, but at a smaller rate than the 880 basis points we saw in Q3 ’20.

Summary / conclusion: In the update on the Financial sector within the last few weeks , the weekly change in the sector growth rates by quarter is a more helpful way of looking at the IBES by Refinitiv data in my opinion. The Tech sector in 2021—per the above data—is currently expecting a 14% EPS growth rate in 2021 versus the ’s expected 2021 EPS growth rate of 22%, so on a relative basis, Tech will grow slower than the S&P 500 in 2021. (This data changes weekly so assume that with Q4 ’20 tech earnings and 2021 guidance, the above expected growth rates will change as well.)

Given its current 27% market cap weight in the S&P 500, as Tech goes, so goes the S&P 500 as we discovered between March 23rd and September 2nd this year.

You’d have to think some of the enormous beneficiaries of the lockdown, or “stay-at-home” stocks will face tough comparisons in 2021 particularly in the 2nd and 3rd quarters of next year.

The bullish sentiment around the S&P 500 today—this week another 2021 return forecast of +20% for the benchmark was heard—is another reason to be more cautious on 2021. I’m starting to think 2021 could be a year of mid-single-digit returns for the benchmark.

Over the weekend, talked about the long-term returns on the S&P 500. If 2020’s YTD return on the S&P 500 of 14% holds till year-end, the “average” return for the S&P 500 over just the last 4 years—from 2017 through YTD 2020—is +15.8%.

It is reasonable to assume that 2021 could be a year where Tech sector growth is fine, but the stocks go nowhere and the sector PE compresses for the year, as all the various asset classes catch-up such as small and mid-cap, value investing and Emerging Markets, International Developed, etc. have a strong year of outperformance.

However, that’s just a guess right now. Take everything read here with a healthy skepticism and invest based on your own risk profile.





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