Normalization of Earnings Growth will Dictate Style Performance in 2022


S&P 500 EPS Growth Comparison for 2021, 2022 & 2023


As a follow-up to last week’s Deflating the Fears of Longer-Term Inflation talking points, we are now well into the second half of Q3 2021 earnings season and if one thing has become crystal clear, it is that 2022 is going to mark the return of “normalized” EPS growth to the broader S&P 500. As analysts are rushing to revise their fiscal year-end 2021 EPS estimates, we want to make note that consensus EPS growth in aggregate for the Market Cap Weighted S&P 500 for 2021 is going from 47% down to a consensus forecast of 8% in 2022. This is to be expected as we are now moving into the normalization phase of the U.S. economic cycle.

What is Normalized Annual EPS Growth for the S&P 500 Over the Past 25 Years?


In the chart below you can see that normalized, annual EPS growth is roughly 7% on average for each of the prior 25 years. Analysts are now forecasting EPS growth for 2022 to be 8% on average confirming this normalization trend for 2022. Now let’s look for any small-cap vs. large-cap EPS growth biases for 2022.

Large Cap vs. Small Cap EPS Growth Biases in Store for 2022?


In the Price and Earnings chart below, we want to make note that EPS growth in aggregate for the Equal Weighted S&P 500 for 2021 is going from 45% down to a forecast of 11% in 2022. This represents a full 3% greater forecast EPS growth rate bias for the “smaller cap” names in the S&P 500 versus the overall 8% forecast EPS growth in 2022 for the Market Cap Weighted S&P 500. Recall that moving from a Market weighted S&P 500 to an Equal weighted S&P 500 effectively strips the market capitalization bias away from the broader S&P 500 as reported by Standard and Poor’s. Conclusion: EPS for smaller capitalization stocks within the S&P 500 are forecast to outgrow EPS for larger capitalization stocks in 2022.

In the chart below, we confirm the S&P 500 smaller capitalization forecast EPS growth bias by comparing Market Weighted S&P 500 EPS growth for 2022 of 8% against the Market Weighted S&P 600 Small-Cap composite of 14%. The smaller cap EPS forecast growth bias is once again confirmed for 2022.

Growth Versus Value EPS Growth Bias in Store for 2022?

By shifting our attention to the 200 stock Growth and 200 stock Value portfolios that Synergy Financial Management uses to perform strategy work, we are easily able quantity differences in forecast EPS growth for 2022.

Value – In the chart below, you will note that value names have come off a 96% increase in forecast EPS growth for 2021 to a ‘normalized’ 8% forecast EPS growth rate for 2022. Conclusion: The forecast EPS growth rate of 8% for the Value portfolio in 2022 matches the 8% forecast EPS growth rate we saw for the Market Weighted S&P 500 EPS Growth in 2022. Value is not expected to outperform the broader S&P 500 in terms of EPS growth in 2022.

Growth – In the chart below you will note that growth names have come off a much more normalized 26% increase in forecast EPS growth for 2021 to an even more normalized 11% forecast EPS growth rate for 2022. Conclusion: The forecast EPS growth rate of 11% for the Growth portfolio in 2022 is greater than the 8% forecast EPS growth rates we saw for BOTH the Market Weighted S&P 500 and Value Portfolios.

In summary, we believe that equity markets will continue to climb the ‘wall of worry throughout 2022’ and we remain optimistic overall for the equity markets in 2022. We actively monitor cross-sections of the market for all aspects of portfolio style tilts. For 2022 the current consensus EPS growth forecast is calling for small-cap and smaller cap stocks within the S&P 500 to beat their larger-cap counterparts. At the same time, the consensus forecast is calling for growth to outperform value and the broader S&P 500 in terms of EPS growth for 2022. Value is expected to match the EPS growth performance of the broader S&P 500 in 2022.


Published November 17, 2021

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO |
CSA, NSSA


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