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Early Q4 Results Show an Improving Earnings Picture

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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 off to a strong start to the Q4 earnings season, with a very high proportion of companies beating estimates and sharing favorable outlooks for the current and coming quarters. This is helping sustain the positive estimate revisions trend that has been in place since July 2020.


  • For the 43 S&P 500 companies that have reported Q4 results already, total earnings are up +7.4% from the same period last year on +3.3% higher revenues, with 93% beating EPS estimates and 76.7% beating revenue estimates. This is a notably better performance than we have seen from the same group of companies in the first three quarters of the year.


  • For the Finance sector, we now have Q4 results from 38.2% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance companies are up +15.5% on +0.2% higher revenues, with 93.8% beating EPS estimates and 62.5% beating revenue estimates.


  • Looking at Q4 as a whole, total earnings for the S&P 500 index are expected to be down -6.4% on +0.5% higher revenues, which would follow the -7.0% earnings decline in Q3 on -0.7% lower revenues.


  • The expected earnings growth pace for Q4 has been steadily improving as a result of better-than-expected Finance sector results.


  • Overall, 9 of the 16 Zacks sectors are expected to experience earnings declines in Q4, with Transportation (-101.2% decline), Energy (-94.3%), Consumer Discretionary (-74.1%) and Conglomerates (-14.2%) as the big decliners.


  • For the Finance sector, Q4 earnings are now expected to be up +10.9% from the same period last year on -1.4% 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, bank earnings have shifted the most relative to the first three quarters of the year, with a combination of reserve releases, cost controls and steady business on the investment banking side helping growth turn positive for the quarter.


  • For the Technology sector, Q4 earnings are expected to be flat or 0.0% on +9.3% 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% decline), Semiconductor (-3.9%) and Telecom Services (-10.3%) industries, offset by gains at the Software & Services industry (+6.5%).


  • Sectors with positive earnings growth in Q4 include Construction (+27.4% earnings growth), Autos (+85.0%), Medical (+7.4%), Basic Materials (11.1%) and Finance (+10.9%).


  • Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline -16.3% on -3.6% 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 28.9X and index close, as of January 19th, is $131.38, down from $156.97 in 2019. Using the same methodology, the index ‘EPS’ works out to $161.73 for 2021 (P/E of 23.5X) and $188.94 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 -17.0% on -2.9% lower revenues. This would follow the -6.3% 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 -10.9% lower revenues, with easy comps pushing earnings growth to +38.2% in 2021.



The overall earnings picture started improving in July, as the U.S. economy came out of the pandemic-driven slump. Each of the subsequent quarterly reporting cycles has been showing a steady improvement in the business conditions relative to the depth of the pandemic.

We are seeing the same improving trend at play in the Q4 earnings season, which has gotten off to a strong start. The banking industry, which dominates the early reporting docket, has reported markedly better earnings results compared to the first three quarters of the year, with all the major players reversing their earlier loan-loss reserve buildups.

This had the biggest impact at JPMorgan (JPM - Free Report) , whose Q4 earnings were up +42.4% from the same period last year, while the same at Citigroup (C - Free Report) represented a +4.2% year-over-year improvement. Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) released loan-loss reserves as well, but their Q4 earnings were still below the year-earlier level. These reserve releases indicate that the big banks are far more optimistic about economic and business conditions for the coming periods.

This has positive read-throughs for all economically sensitive sectors, which should help sustain the positive revisions trend in earnings estimates that we have been seeing since July 2020. The chart below shows how estimates for the current period (2021 Q1) have evolved since mid-December.













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.

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 (2020 Q4) will likely remain under pressure, we should expect the outlook to steadily improve. Beyond the Q4 earnings season, the outlook remains positive.

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