Note: The following is an excerpt from this week’s report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, Earnings Trends please click here>>> Here are the key points: We are close to turning the page on the Q3 earnings season, which turned out to be notably better than expected. A very high proportion of companies were able to beat Q3 EPS and revenue estimates, even though estimates for the period had actually gone up ahead of the start of the reporting cycle.
The key takeaway from the Q3 earnings season is a steadily improving outlook, with estimates for the current and coming periods going up.
Looking at the quarter as a whole, total S&P 500 earnings are expected to decline -7.2% on -0.8% lower revenues. Earnings growth for the quarter drops to -13.2% on an ex-Technology basis, but improves to -3.4% on an ex-Energy basis. The growth picture steadily improved as companies came out with better-than-expected results.
Sectors with the weakest Q3 growth outlook remained the social-distancing exposed spaces like Transportation (-116.8% earnings decline), Energy (-98.3%), and Consumer Discretionary (-72.0%).
Out of the total 16 Zacks sectors, 9 experienced earnings declines in Q3, with Construction, Medical, Technology, Autos, Retail, Consumer Staples, and Utilities showing earnings growth.
For the current period (2020 Q4), total S&P 500 earnings are expected to be down -11.2% on +0.1% higher revenues. Estimates for the quarter are steadily going up, a trend that we saw in Q3 as well, but the pace of improvement has decelerated in recent days.
Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline -17.1% on -3.9% lower revenues in 2020 and increase +21.9% on +7.5% higher revenues in 2021. Estimates for both years have been going up.
The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 27.6X and index close, as of December 1st, is $132.63, down from $159.96 in 2019. Using the same methodology, the index ‘EPS’ works out to $161.72 for 2021 (P/E of 22.6X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
As with the large-caps, the Q3 earnings season turned out to be very small for the small-cap stocks as well. Total Q3 earnings for the 94.7% of S&P 600 member companies that have reported are down -5.8% on -5.4% lower revenues, with 72.8% beating EPS estimates and 72.9% beating revenue estimates.
For full-year 2020, the S&P 600 index is expected to experience a -30.4% decline in earnings on -10.6% lower revenues, with easy comps pushing earnings growth to +33.6% in 2021.
The overall earnings picture started improving in July, as the U.S. economy came out of the pandemic-driven slump. While pockets of entrenched weakness remain, the pace and magnitude of the recovery has largely been better than expected. This improving trend has been showing up in positive estimate revisions, with analysts steadily raising their estimates. We saw this earlier with Q3 estimates and we are seeing the same trend in play for Q4 estimates as well, as the chart below shows.
Estimates have largely been stable over the last few weeks, with the current -11.2% expected decline in Q3 unchanged from last week. With the bulk of the reporting cycle now behind us (only 9 S&P 500 results are still to come), there is simply not enough new information that will prompt analysts to update their models. Most of the recent reports have been coming from traditional retailers, with many of them coming out with impressive results. For example, Target ( TGT Quick Quote TGT - Free Report) posted Q3 earnings that were +101.1% higher than the year-earlier period on +21.3% higher revenue, while Walmart’s ( WMT Quick Quote WMT - Free Report) earnings and revenues were up +15.3% and +5.2%, respectively. The year-over-year growth rates at home improvement operators Home Depot ( HD Quick Quote HD - Free Report) and Lowe’s ( LOW Quick Quote LOW - Free Report) have been similarly impressive. While these retailers have thrived during the pandemic, the traditional department store operators have been struggling to survive, with a number of them going under. Looking at Q3 as a whole, combining the results that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to decline -7.2% from the year-earlier level on -0.8% lower revenues. The chart below shows the quarterly earnings and revenue growth picture.
Looking at the outlook on an annual basis, index earnings are expected to decline -17.1% this year, after staying essentially flat last year. Growth is expected to resume next year, with easy comparisons driving most of the growth. The chart below shows the overall earnings picture on an annual basis. Legal Marijuana: An Investor’s Dream Imagine getting in early on a young industry primed to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027. Although marijuana stocks did better as the pandemic took hold than the market as a whole, they’ve been pushed down. This is exactly the right time to get in on selected strong companies at a fraction of their value before COVID struck. Zacks’ Special Report, Marijuana Moneymakers, reveals 10 exciting tickers for urgent consideration. Download Marijuana Moneymakers FREE >>