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Early Signs of Earnings Improvement

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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:

  • We are starting to see some early signs of improvement in earnings estimates for the current period (2020 Q3) and beyond. This will be a notable shift in the post-pandemic earnings picture, if the improving trend remains in place through the remainder of the ongoing Q2 earnings season.


  • The revisions trend for the second half of the early round of Q2 results from the big banks suggests that while the pandemic’s earnings impact may have bottomed in the period, the outlook still remains uncertain.


  • Total earnings for 76 S&P 500 members that have reported Q2 results already are down -45.3% on -5.2% lower revenues, with 75% beating EPS estimates and 63.2% beating revenue estimates.


  • This is the lowest earnings growth pace since the last earnings downturn following the 2008 recession, but the EPS beats percentages are tracking above what we had seen from the same group of index members in the last two reporting cycles.


  • Most companies are still unable to provide any meaningful guidance, but the tone of management commentary is relatively more favorable compared to what we experienced during the Q1 earnings season.


  • For the Finance sector, we now have Q2 results for 42.6% of the sector’s market capitalization in the S&P 500 index. Total earnings for these banks are down -57.1% on +6.0% 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 -43.4% from the same period last year on -10.0% lower revenues, with 15 of the 16 Zacks sectors expected to experience earnings declines (Utilities sector earnings are expected to be up +0.1%) 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 (-149.4% earnings decline), Autos (-231.0%), Transportation (-152.4%) and Consumer Discretionary (-116.4%).


  • Other sectors expected to suffer big earnings declines in Q2 include Conglomerates (-74.4%), Aerospace (-65.5%), Basic Materials (-59.2%), Industrial Products (-49.9%), Retail (-40.5%) and Finance (-42.4%).


  • 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 -11.9% from the year-earlier period on -0.7% lower revenues.


  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -23.9% on -5.7% lower revenues. This is down from close to +8% growth expected at the start of the year, but modestly up from last week’s -24.1% decline. 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 26.6X and index close, as of July 21st, is $122.25, down from $160.67 in 2019. Using the same methodology, the index ‘EPS’ works out to $154.63 for 2021 (P/E of 21.1X), below the 2019 level ($160.67). 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 +26.5% 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 -85.4% from the same period last year on -15.8% lower revenues. This would follow an earnings decline of -72.1% in Q1 on -5.3% lower revenues.


  • For full-year 2020, S&P 600 earnings are expected to be down -50.1% from the same period last year on -6.6% higher revenues, which would follow -7.0% earnings decline in 2019 on +4.3% higher revenues.


The growth picture emerging from the ongoing Q2 earnings season is very weak, with S&P 500 earnings on track to decline the most since the last earnings downturn following the 2008 recession. Also, most companies are still unable to provide guidance on account of the pandemic-driven uncertainty. But it isn’t all doom and gloom, with some early signs of stabilization and even improvement starting to emerge.

You can see these green shoots in EPS estimates for companies like Texas Instruments (TXN - Free Report) , JPMorgan (JPM - Free Report) , Whirlpool (WHR - Free Report) , Goldman Sachs (GS - Free Report) and others. These favorable estimate revisions have started showing up in the aggregate picture as well, with aggregate earnings for the S&P 500 index modestly moving up in recent days, as the chart below showing the evolution of Q3 earnings growth estimates shows.













This is still early going in the Q2 reporting cycle, as we have seen results from only about 15% of the S&P 500 members, and the above favorable revisions trend could reverse or fade. But it is nevertheless a positive development on the post-pandemic earnings front. The chart below shows the quarterly earnings and revenue growth picture.












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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