Earnings growth in the S&P 500 has been a hot topic of late, with more than 80% of companies reporting increased earnings. This is one of the highest shares in the past 20+ years, and it’s worth exploring what this trend could mean for investors.

Firstly, it’s important to note that the current rate of earnings growth is on par with what we saw post-GFC (Global Financial Crisis). This is a significant milestone, as it suggests that the US economy has been able to recover and grow in a relatively short period of time. However, the share of companies growing earnings is not significantly higher than what we saw during the COVID era, which is even more remarkable.

What’s particularly interesting is that if consensus is correct, S&P 500 earnings would grow 20% YoY for four straight quarters – a run that has occurred only 10 times since the 1930s. This level of growth is exceptionally rare outside of an EPS recession, occurring once in the 2010s and one in the 1950s.

So what could be driving this unusual earnings growth? There are a few factors that could be contributing:

1. Economic growth: The US economy has been growing steadily over the past few years, with GDP (Gross Domestic Product) increasing at a moderate pace. This growth is likely to continue, especially given the current low unemployment rate and stable inflation environment.
2. Corporate cost-cutting: Many companies have been able to reduce their costs and improve their profitability through various means, such as automation, outsourcing, and streamlining operations. This has allowed them to increase their earnings despite flat revenue growth.
3. Tax cuts: The Tax Cuts and Jobs Act (TCJA) passed in 2017 significantly reduced the corporate tax rate, which has given companies more room to invest in their businesses and expand their operations. This could be contributing to the increased earnings growth.
4. Innovation: The US economy is known for its innovative spirit, and many companies are constantly developing new products and services that can drive growth. This could be leading to increased earnings across various sectors.

While this trend of earnings growth is certainly promising, it’s worth noting that the S&P 500 is a broad market index that includes companies from many different industries and sectors. As such, there may be some variability in earnings growth across individual companies and sectors.