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Q2 2020 Earnings Season Gets Underway

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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 early round of Q2 results from the big banks suggests that while the pandemic’s earnings impact may have bottomed in the period, but the outlook still remains uncertain.
  • Including results from the major banks, we now have Q2 reports from 32 S&P 500 members, with total earnings for these 32 companies down -54.3% on -3.4% lower revenues. Of the results that have come out, 71.9% have beaten EPS estimates and 59.4% have beaten revenue estimates.
  • This is a lower proportion of EPS and revenue beats percentages than we saw from this same group of companies in the preceding reporting cycle, suggesting that Q2 estimates likely aren’t low enough to be easily beaten.
  • For the Finance sector, we now have Q2 results for 22.1% of the sector’s market capitalization in the S&P 500 index. Total earnings for these banks are down -70.5% on +3.1% higher revenues estimates, as strong gains in trading and investment banking businesses were more than offset by large pandemic-driven loan loss provisions.
  • Looking at Q2 as a whole, total S&P 500 earnings are expected to be down -44.9% from the same period last year on -10.5% lower revenues, with all 16 Zacks sectors expected to experience earnings declines and four sectors expected to loses money (declines in excess of -100%).
  • The four sectors that are expected to lose money in Q2 are Energy (-145.7% earnings decline), Autos (-232.0%), Transportation (-152.9%) and Consumer Discretionary (-116.1%).
  • Other sectors expected to suffer big earnings declines in Q2 include Conglomerates (-73.5%), Aerospace (-64.3%), Basic Materials (-59.0%), Industrial Products (-51.6%), Retail (-41.4%) and Finance (-44.7%).
  • The Technology sector stands out for having a lower earnings decline in Q2 relative to other large sectors, with total earnings for the sector expected to decline -13.1% from the year-earlier period on -1.0% lower revenues.
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -24.1% on -5.8% 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 26.2X and index close, as of July 14th, is $121.95, down from $160.65 in 2019. Using the same methodology, the index ‘EPS’ works out to $154.47 for 2021 (P/E of 20.7X), below the 2019 level ($160.65). 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 +26.7% 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 -87.6% from the same period last year on -16.7% lower revenues. This would follow an earnings decline of -72.1% in Q1 on -5.5% lower revenues.
  • For full-year 2020, S&P 600 earnings are expected to be down -46.4% from the same period last year on +0.8% higher revenues, which would follow -5.7% earnings decline in 2019 on +4.1% higher revenues.


The big banks that kicked off the Q2 earnings season for the Finance sector all reported big provisions for loan losses; these are moneys set aside in anticipation of the loans that the banks believe will go bad. JPMorgan (JPM - Free Report) booked a $10.5 billion reserve, while Citi (C - Free Report) and Wells Fargo (WFC - Free Report) reserved $7.9 billion and $9.57 billion, respectively.

Banks with bigger investment banking and capital markets franchises have been able to offset some of the squeeze through strong trading and investment banking revenues. Trading revenues increased an impressive +99% at JPMorgan and +60% at Citi and Goldman Sachs (GS - Free Report) benefited from the same trend.

Wells Fargo has been dealing with a number of company-specific issues lately and we saw that in the bank’s Q2 results as well; it actually lost money in the period as it simply lacked the investment banking and capital markets offset that helped its peers.

The regional banks that will be reporting results in the coming days also don’t have capital markets and investment banking businesses and will most likely be actively provisioning for loan losses.

These provisions reflect management’s base-case outlook for their loan portfolios, which in turn is a function of their outlook for the broader economy. Given the all-around uncertainty about the outlook in the wake of the recent upsurge in infection rates, they were unable to provide much guidance for the second half of the year. That said, the expectation in the market is that the worst is now behind us and the picture will continue to clear up as we move further into Q3 and beyond.

It is still early going in the Q2 reporting cycle. But for the companies that have reported already, earnings are down more than -50% and the declines for banks is more than -70%. These numbers will obviously change as more companies report results, but there is little doubt that Covid-19 has been a big hit for corporate earnings.

The bulk of that earnings hit will remain concentrated in Q2, but the ‘pain’ will linger in the second half of the year as well, as the chart below of quarterly earnings and revenue growth rates show.











The chart below shows the overall earnings picture on an annual basis.











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.

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