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A Positive and Reassuring 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:

  • Estimates for the current and coming quarters are steadily going up, as companies report Q4 results that are mostly better than expected. This is helping sustain the positive estimate revisions trend that has been in place since July 2020.
     
  • For the 114 S&P 500 companies that have reported Q4 results already, total earnings are down -4.0% from the same period last year on +0.6% higher revenues, with 83.3% beating EPS estimates and 77.2% 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 51.5% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance companies are up +17.0% on +0.9% higher revenues, with 88.9% beating EPS estimates and 69.4% beating revenue estimates.
     
  • Excluding the Finance sector’s strong contribution, Q4 earnings for the rest of the companies that have reported results would be down -15.7% (vs. -4% including Finance). On the other hand, the reported growth rate would be +1.6% instead of -4% had it not been for the Boeing drag.
     
  • Total Q4 earnings for the 31.6% of the Tech sector’s market cap that has reported results are up +5.2% on +3.9% higher revenues, with 94.1% beating EPS estimates and 88.2% beating revenue estimates.    
     
  • Looking at Q4 as a whole, total earnings for the S&P 500 index are expected to be down -5.6% on +1.0% higher revenues, which would follow the -7.0% earnings decline in Q3 on -0.7% lower revenues.
     
  • Overall, 9 of the 16 Zacks sectors are expected to experience earnings declines in Q4, with Transportation (-101.7% decline), Energy (-97.5%), Consumer Discretionary (-77.0%) and Conglomerates (-11.1%) as the big decliners.
     
  • For the Finance sector, Q4 earnings are now expected to be up +15.2% from the same period last year on -1.1% lower revenues, which would follow declines of -11.7% in 2020 Q3, - 45.3% in Q2, and -32.4% in Q1.
     
  • For the Technology sector, Q4 earnings are expected to be up +6.8% on +11.2% higher revenues, which would follow the +13% earnings growth in Q3.
     
  • Sectors with positive earnings growth in Q4 include Construction (+32.5% earnings growth), Autos (+76.9%), Medical (+8.2%), Basic Materials (12.8%) and Finance (+15.2%).
     
  • Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline -16.3% on -3.1% lower revenues in 2020 and increase +24.2% 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 29.3X and index close, as of January 26th, is $131.17, down from $156.71 in 2019. Using the same methodology, the index ‘EPS’ works out to $162.93 for 2021 (P/E of 23.6X) and $189.18 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 -13.8% on -2.6% 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 -28.9% decline in earnings on -10.7% lower revenues, with easy comps pushing earnings growth to +38.1% in 2021.

 

 

 

For the 114 S&P 500 members that combined account for 29.3% of the index’s total market capitalization, total Q4 earnings are down -4% from the same period last year on +0.6% higher revenues, with a very high 83.3% beating EPS estimates and an even more impressive 77.2% beating revenue estimates.

The reported Q4 earnings growth rate has benefited from strong results in the Finance sector, where reserve releases helped the major banks boost their profitability. For example, JPMorgan’s (JPM - Free Report) Q4 earnings jumped +42.4% from the year-earlier period, as the banking giant reversed course on the loan-loss reserves.

As a result, Q4 earnings for the Finance sector companies that have reported results are up +17%. Excluding this hefty contribution from the Finance sector, the reported growth rate declines to -15.7%. On the other hand, Boeing’s (BA - Free Report) kitchen-sink report is having the opposite effect on the reported growth rate, which improves to +1.6% from -4% once the company’s Q4 report is excluded.

Barring a few exceptions, results have been stronger than expected. That is not just the case in the Finance sector, with bellwethers from a host of other spaces like 3M (MMM - Free Report) , Microsoft (MSFT - Free Report) , Johnson & Johnson (JNJ - Free Report) and others not only beating estimates but also providing either raised guidance or favorable commentary on trends in business conditions. This is helping 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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