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An Improving Earnings Outlook Despite Covid-19 Concerns

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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 revisions trend has notably improved lately, with estimates for the current period (2020 Q3) and beyond continuing to go up. This is a notable shift in the post-pandemic earnings picture if it remains in place through the remainder of the ongoing Q2 earnings season.
  • Total earnings for 205 S&P 500 members that have reported Q2 results already are down -40.2% on -7.6% lower revenues, with 76.1% beating EPS estimates and 64.9% 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 Technology sector, we now have Q2 results from 38.1% of the sector’s market capitalization in the index. Total earnings for these Tech companies are down -5.9% on +0.3% higher revenues, with 85.7% beating EPS estimates and 78.6% beating revenue estimates. This is a bigger beats percentage than we saw from the same group in the preceding quarter.         
  • For the Finance sector, we now have Q2 results for 55.6% of the sector’s market capitalization in the S&P 500 index. Total earnings for these banks are down -56.2% on +2.5% 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 -41.1% from the same period last year on -8.9% lower revenues, with 15 of the 16 Zacks sectors expected to experience earnings declines (Utilities sector earnings are expected to be up +0.4%) and four sectors expected to lose money (declines in excess of -100%).
  • The four sectors that are expected to lose money in Q2 are Energy (-147.1% earnings decline), Autos (-193.1%), Transportation (-154.6%) and Consumer Discretionary (-117.8%).
  • Other sectors expected to suffer big earnings declines in Q2 include Conglomerates (-61.7%), Aerospace (-72.3%), Basic Materials (-56.7%), Industrial Products (-47.9%), Retail (-39.3%) and Finance (-41.9%).
  • The Technology sector stands out for having the second lowest earnings decline in Q2 relative to other large sectors, with total earnings for the sector expected to decline -10.0% from the year-earlier period on +0.7% higher revenues.
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -23.5% on -5.3% lower revenues. This is down from close to +8% growth expected at the start of the year, but modestly up from -24.1% decline two weeks ago. 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 28th, is $122.93, down from $160.67 in 2019. Using the same methodology, the index ‘EPS’ works out to $155.93 for 2021 (P/E of 20.6X), 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 +26.8% 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, we have Q2 earnings from 165 index members. Total earnings for these small-cap companies are down -44.2% from the same period last year on -12.9% lower revenues, with 83.6% beating EPS estimates and 70.9% beating revenue estimates.
  • The proportion of S&P 600 members beating Q2 EPS and revenue estimates is significantly above historical levels, suggesting that estimates for these small-cap companies may have been too low.


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 41% 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. But the worry is that the ongoing rebound in infections will moderate the recovery’s momentum. 

We will see if these expectations pan out.

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