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What Will Q2 Earnings Season Show?

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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • The Q2 earnings season takes the spotlight as the big banks come out with results next week. Expectations remain low, both for banks as well as most other sectors, with total S&P 500 earnings expected to be down -44.4% on -10.9% lower revenues.


  • The pandemic-driven earnings hit is expected to bottom in Q2, with the declines in second half of the year expected to improve from the Q2 level.


  • The massive negative revisions trend of the last three months appears to have eased in recent days, but that could change as companies start reporting June-quarter results next month and provide guidance. 


  • Four sectors that are expected to lose money in Q2 (year-over-year declines of -100% or more) are Energy (-139.3% earnings decline), Autos (-231.9%), Transportation (-151.5%) and Consumer Discretionary (-115.8%).


  • Other sectors expected to suffer big earnings declines in Q2 include Conglomerates (-73.2%), Aerospace (-63.1%), Basic Materials (-59.1%), Industrial Products (-52.9%), Retail (-40.6%) and Finance (-40.2%).


  • The Technology sector stands out for having a lower earnings decline in Q2 relative to other sectors, with total earnings for the sector expected to decline -13.4% from the year-earlier period on -1.2% lower revenues.


  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -24.3% on -5.9% lower revenues. This is down from close to +8% growth expected at the start of the year. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.


  • Growth is expected to resume next year, thanks to easy comparisons, but the dollar level of earnings in 2021 will still be below the 2019 level.


  • The implied ‘EPS’ for the index, calculated using current 2020 P/E of 25.9X and index close, as of July 7th, is $121.64, down from $160.69 in 2019. Using the same methodology, the index ‘EPS’ works out to $154.79 for 2021 (P/E of 20.3X), modestly below the 2019 level ($160.69). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


  • Please note that while full-year 2021 earnings for the S&P 500 index are currently expected to be up +27.3% from the 2020 level, the absolute dollar amount of 2021 earnings estimates remain below the 2019 level.


  • For the small-cap S&P 600 index, total Q2 earnings are projected to be down -87.8% from the same period last year on -16.8% lower revenues. This would follow an earnings decline of -72.6% in Q1 on -5.7% lower revenues.


  • For full-year 2020, S&P 600 earnings are expected to be down -46.8% from the same period last year on +0.7% higher revenues, which would follow -5.7% earnings decline in 2019 on +4.2% higher revenues.


The earnings hit suffered as a result of the Covid-19 pandemic will likely be durable, with overall earnings for the S&P 500 index expected to remain below pre-pandemic levels even in 2021. This is particularly so for sectors like Energy, Transportation, Consumer Discretionary, Industrial Products and even Finance expected to earn less in 2021 than they did in 2019.

The Covid-19 earnings impact is not uniformly distributed across all sectors, with Technology and Medical expected to perform reasonably well. The earnings declines for the Technology and Medical sectors this year are very modest and these sectors are expected to recoup those declines very quickly. As a result, 2021 earnings for the Tech and Medical sectors are expected to be up +8.9% and +12.9% over the 2019 levels, respectively.

No doubt, stocks in these spaces have been standout performers in the market’s rebound from the March 23rd lows. The strong performance from some of the largest Technology companies during the pandemic is an acknowledgement of these companies’ earnings power.

Five S&P 500 companies - Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Facebook and Apple (AAPL - Free Report) – now account for 23.1% of the index’s total market capitalization. This is significantly above these companies’ earnings contribution to the index’s total, expected to be 14.5% of the total this year. But this earnings contribution is up from 11.9% in 2019.

Some will legitimately interpret this disparity as a valuation question, but the fact remains that these large technology companies have proven their ability to profitably grow during these uncertain times, a feat that few others can match.

The Covid-19 earnings impact can clearly be seen in the chart below.










Unlike the level of earnings, the rate of change on a year-over-year basis will turn positive next year in a major way, as the chart below shows.










The recent flow of economic readings has broadly been positive, suggesting that the hoped-for recovery is firmly in place. The worry is that the ongoing rebound in infections will derail the momentum. 

We will see if these expectations pan out.

5 Stocks to Soar Past the Pandemic: In addition to the companies you learned about above, we invite you to learn about 5 cutting-edge stocks that could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of the decade.

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