The Big Picture: Sources of SPX Earnings Growth

While the market can be volatile on a daily basis, stocks tend to go up or down over time as earnings improve. There are many ways that earnings can improve.

A company could find a way to earn more for the same amount of revenue, and increase its profit margins. Or they could grow overall revenue even if margins stay the same or decline. And many companies have learned that they can increase their earnings per share by regularly buying back shares and shrinking the float.

Over at The Big Picture, Barry Ritholtz has looked over the latest data compiled for earnings growth in the S&P 500 for 2021.

The year-over-year numbers are impressive. Every source that could contribute to earnings growth did so last year.

A surge in stock buybacks led to a 0.6 percent decline on average, compared to a 0.3 percent rise on average. Revenues rose by 19 percent on average versus a 3 percent gain on average.

But the biggest winner came from increased profit margins, which rose 51.8 percent on average versus a 2.8 percent average.

That’s an amazing jump higher, and one that may be difficult to replicate going forward. That may be another reason why stocks have been sagging recently. Following the depressed levels of 2020, 2021’s numbers represent both a return to normal and some slight real growth on top of that.

The full blog, with all the charts and graphs showing the changes, can be read here.