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Looking Ahead to the Q3 Earnings Season

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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 overall earnings picture started improving in a notable way as Q3 got underway and the U.S. economy started recovering. Q3 earnings are still expected to be below the year-earlier level, but the projected rate of decline has improved relative to what was expected three months back.
  • For 2020 Q3, total S&P 500 earnings are expected to decline -23.9% on -3.3% lower revenues. This is an improvement from the -26.5% earnings decline expected at the start of July and follows the -32.7% earnings drop in Q2.
  • Sectors with the weakest Q3 growth outlook remain the social-distancing exposed spaces like Transportation (-128.8% earnings decline), Energy (-97.5%), and Consumer Discretionary (-89.2%).
  • 15 of the 16 Zacks sectors are expected to experience earnings declines in Q3, with the Construction sector as the only one expected to show earnings growth.
  • Medical (earnings decline of -0.1%), Utilities (-3.1%), Technology (-5.1%), and Retail (-7.8%) are the sectors with the lowest expected earnings declines in Q3.
  • Q3 earnings for the Finance, Industrial Products and Basic Materials sectors are expected to be down -25.7%, -27% and -31.1% from the year-earlier period, respectively.
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -20.9% on -4.9% lower revenues. As with Q3 estimates, full-year estimates have improved since early July. 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 S&P 500 index, calculated using current 2020 P/E of 26.3X and index close, as of September 8th, is $126.65, down from $160.15 in 2019. Using the same methodology, the index ‘EPS’ works out to $158.63 for 2021 (P/E of 21.0X). 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 +25.2% 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, Q3 earnings are expected to be down -39.0% from the same period last year on -6.7% lower revenues, which would follow -64.7% decline on -21% lower revenues in 2020 Q2.
  • For full-year 2020, the S&P 600 index is expected to experience a -39.7% decline in earnings on -6.9% lower revenues, with easy comps pushing earnings growth to +41.9% in 2021.


The Q3 earnings season will really get underway after the big banks come out with quarterly results on October 20th. But we will have counted almost two dozen companies to have reported Q3 results by that time, as we and other data vendors consider companies reporting their fiscal quarters ending in August as part of the Q3 tally.

Using that definition, we will see Oracle (ORCL - Free Report) kickstart the Q3 reporting cycle this week, followed by bellwethers such as Nike (NKE - Free Report) , FedEx (FDX - Free Report) , Adobe (ADBE - Free Report) and others in the days to come.

The tone and substance of earnings releases notably improved in the Q2 earnings season relative to what we had seen in the Q1 reporting cycle. This improvement showed up in the revisions trend that we have been consistently pointing out, though the pace of improvement has slowed over the last few weeks. The chart below shows how estimates for Q3 evolved since early July.












We are seeing a similar improvement in estimates for Q4 2020 and full-year 2021 as well. 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 been broadly positive, suggesting that the hoped-for recovery is firmly in place. This is showing up in earnings estimates as well, as indicated earlier. The question at this stage is whether the improving trend can continue even as the underlying health issue remains unresolved.

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