Here are the key points: The earnings reports will be for the last quarter of 2020, but the market’s focus will be on expectations for full-year 2021. We strongly believe that the revisions trend which has steadily been positive for the last few months will accelerate to the upside as the vaccination exercise reaches critical mass beyond Q1. For 2020 Q4, S&P 500 earnings are expected to be down 9.8% on 0.3% higher revenues, which would follow a 7.0% earnings decline in Q3 on 0.7% lower revenues. Overall, 11 of the 16 Zacks sectors are expected to experience earnings declines in Q4, with Transportation (-100.6% decline), Energy (-92.9%), Consumer Discretionary (-71.9%) and Conglomerates (-14.6%) as the big decliners. For the Finance sector, Q4 earnings are expected to be down 4.8% on 2.4% lower revenues, which would follow declines of -11.7% in 2020 Q3, - 45.3% in Q2 and -32.4% in Q1. Within the Finance sector, banks are still faced with a tough operating environment and are expected to experience 21.4% lower earnings relative to the same period last year, partly offset by earnings growth at the insurance and brokerage/money management industries. For the Technology sector, Q4 earnings are expected to be down 0.3% on 9.2% higher revenues, which would follow the 13% earnings growth in Q3. Within the Technology sector, Q4 earnings are expected to be down in the Computer Hardware (-7.6%), Semiconductor (-4.1%) and Telecom Services (-10.7%) industries, offset by gains at the Software & Services industry (+6%). Sectors with positive earnings growth in Q4 include Construction (+27.3%), Autos (+83.4%), Medical (+6.5%), Basic Materials (+9%) and Aerospace (+4.4%). The Q4 reporting cycle has gotten underway already, as 19 S&P 500 members with fiscal quarters ending in November, have reported results in recent days. Total earnings for these early reporters are up 18.7% on 9.3% higher revenues, with all the companies beating EPS estimates and 84.2% beating revenue estimates. Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline 16.4% on 3.8% lower revenues in 2020 and increase 23.1% on 7.6% 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 29X and index close, as of January 12th, is $131.05, down from $156.87 in 2019. Using the same methodology, the index ‘EPS’ works out to $161.36 for 2021 (P/E of 23.6X) and $188.23 for 2022. The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year. For the small-cap S&P 600 index, Q4 earnings are projected to fall 17.9% on 3.1% lower revenues. This would follow the 6% decline on 4.9% lower revenues in Q3. For full-year 2020, the S&P 600 index is expected to experience a 29.7% decline in earnings on 10.7% lower revenues, with easy comps pushing earnings growth to 37.8% 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, even though the more recent data appear to show a moderation in activity levels in response to the ongoing infection surge. 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 for full-year 2021 have gone up as well, but we see a significant acceleration in the favorable revisions trend in the coming months on the back of a stronger-than-expected rebound in consumer and business spending as the ongoing vaccination effort gains pace. We strongly feel that current consensus estimates for 2021 GDP and earnings growth understate the full extent of the rebound. On the Q4 earnings season front, we have already seen quarterly results from 19 S&P 500 members. All of these companies, which includes bellwethers like Costco (, COST Quick Quote COST - Free Report) Nike (, NKE Quick Quote NKE - Free Report) FedEx (, FDX Quick Quote FDX - Free Report) Oracle ( and others, have reported results for their fiscal quarters ending in November. We and other data vendors count these November-quarter results as part of the overall Q4 tally. ORCL Quick Quote ORCL - Free Report) The chart below shows the quarterly earnings and revenue growth picture:
We remain positive in our earnings outlook, as we see the full-year 2021 growth picture steadily improving through the first half of the year as more of the population gets vaccinated. We strongly feel that current consensus economic growth projections reflect learned experiences of economic recoveries from the last few recessions. We don’t think that this recovery will follow this past pattern as this downturn was fundamentally different, as its epicenter was medical and not financial. As such, we see significant upside to current consensus GDP growth estimates for 2021, which drives our favorable earnings outlook for the year and beyond. The chart below shows the overall earnings picture on an annual basis:
The flow of recent economic readings about the labor market, factory space and even retail sales suggest that activity levels have moderated in response to the ongoing surge in infections. But with the extraordinary vaccination effort already underway, it is reasonable to expect the pandemic getting under control towards the end of the first quarter of 2021. As such, while growth in the current period (Q4-20) will likely remain under pressure, we should expect the outlook steadily improving in the New Year. Beyond the Q4 earnings season, the outlook remains positive. The Hottest Tech Mega-Trend of All Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>