The stock market's biggest driver of gains is on pace for a surprise return to positive territory for the first time since the pandemic started

• Profit growth - which has historically been the biggest driver of stock-market returns - is finally returning to expansion territory after a year of declines.
• Corporate earnings are set to stage their first quarter of year-over-year growth since the fourth-quarter of 2019.
• With half of the S&P 500 already reporting fourth-quarter earnings, profits are on pace to grow at nearly 2%, according to data from FactSet.
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Corporate earnings growth, which has historically been the main driver of stock market returns, is set to return to expansion territory for the first time since the fourth quarter of 2019.

With more than half of the S&P 500 having already reported earnings, year-over-year profit growth stands at 1.7%, according to data from FactSet. That's on pace to be even better than the fourth quarter of 2019, when earnings grew 0.8%.

Corporate profits plunged in the first three quarters of 2020 amid the COVID-19 pandemic, and were expected to continue that decline in the fourth quarter. As of December 31, analysts had estimated earnings would decline by 9.3% in the fourth-quarter.

But positive earnings surprises from companies within the financial, technology, and communication services sectors helped drive better than expected earnings for the quarter. On the flipside, the industrials sector was the largest detractor to the improvement in earnings for the fourth-quarter, according to FactSet.

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Of the S&P 500 companies that have already reported earnings, 81% have reported a positive EPS surprise, and 79% have reported a positive revenue surprise.

"If 81% is the final percentage, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008," FactSet said in a Friday note.

For all of 2020, S&P 500 companies are reporting an earnings decline of 11.4% and a revenue decline of 1.1%. But 2021 should represent a strong return to growth for corporate earnings, according to analyst estimates.

For calendar year 2021, analysts project earnings growth of 23.4% and revenue growth of 9%, according to FactSet data.

The recent earnings data gives the S&P 500 a 12-month P/E ratio of 22.0x, which is above its 5-year and 10-year averages of 17.6x and 15.8x, respectively, according to FactSet.

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