2021 Was A Banner Year For Corporate Earnings

The year 2021 was a banner year for corporate earnings on both sides of the Atlantic, according to FactSet, which keeps a close tally of corporate reports.

On this side of the Atlantic, corporate earnings in the U.S. grew at a record rate in 2021.

"The estimated [year-over-year] earnings growth rate for CY 2021 is 45.1%, which is well above the trailing 10-year average [annual] earnings growth rate of 5.0% [2011-2020]," says John Butters, vice president and senior earnings analyst at FactSet. "If 45.1% is the actual growth rate for the quarter, it will be the highest [year-over-year] annual earnings growth rate for the index since FactSet began tracking this metric in 2008. The current record is 39.6%, which occurred in CY 2010."

The solid 2021 corporate earnings were driven by four sectors beating the S&P 500, including industrials, materials, consumer discretionary and financials.

On the other side of the Atlantic, European corporations have been reporting strong corporate earnings, too.

"On aggregate, the STOXX Europe 600 is expected to grow the top line by 16%, up from the 14% growth projection back in September," says Sebastian Segerstrom, a product strategist at FactSet. "This is a dramatic turnaround compared to 2020 when the STOXX Europe 600 on aggregate reported an 11% sales decline and more than 50% of the sectors saw negative sales."

The strong showing in European corporate earnings growth was led by gains in the energy and basic materials sectors.

Wall Street liked what it saw in corporate earnings, helping the shares of listed companies stage a strong rally, with the S&P 500 hitting another record high last week for the year 2021.

What's behind the solid corporate earnings growth in 2021? The economic recovery, easy comparisons and accommodative monetary policy.

Economic recovery

All sectors that led the strong recovery on both sides of the Atlantic are cyclical. These sectors move in tandem with the business cycles, rising and falling with the overall activity. The year 2021 was an economic recovery year, as the pandemic lockdowns eased and the world economy exited the pandemic recession. Thus, it boosted cyclical sectors like industrials, materials and energy. These are also sectors which got a boost from the resurgence of inflation.

Easy comparisons

"The unusually high growth rate for the year is due to a combination of higher earnings for 2021 and an easier comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on several industries," adds Butters.

Accommodative monetary policy

Although a strong economy and easy comparisons take most of the credit for the strong earnings, accommodative policy deserves some credit, too. Throughout the year, central banks on both sides of the Atlantic maintained their pandemic-era, easy-money policies. These policies included the conventional instruments, which kept short-term interest rates near zero, and nonconventional procedures (quantitative easing), which kept long-term interest rates at record low levels.

Ultra-low interest rates helped corporate earnings in two ways. First, they helped maintain a high level of spending across the economy, which helped the top line of these companies. Second, they lowered the cost of capital financing, helping the top line of the listed companies.

The bottom line

The year 2021 was a banner year for corporate earnings due to several favorable factors. But some of these factors may go away in 2022. For example, the economic recovery shows signs of slowing, monetary policy is reversing course on both sides of the Atlantic, and comparisons for 2022 begin from a higher rather than a lower base.

Wall Street bulls should trim their expectations for another banner year if they don't want to set themselves up for a big disappointment in 2022.