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The Earnings Uncertainty

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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:

  • There is a big question mark over consensus earnings estimates for the current and coming quarters that primarily reflects the difficulty of quantifying the full impact of this pandemic.


  • Estimates for 2020 Q1 and Q2 have come down sharply in recent weeks, with both the quarters in negative territory now and all of this year’s growth now coming from the back half of the year.


  • Total Q1 earnings or aggregate net income for the S&P 500 index are currently expected to be down -1.7% from the same period last year. This is down from close to +4% growth expected in early January. This magnitude of decline to 2020 Q1 estimates is only modestly bigger than what we witnessed in the comparable periods over the last few quarters.


  • A big contributing factor to this seemingly ‘average’ decline in earnings estimates is the uncertainty of the pandemic’s full impact that has prompted many companies to simply withdraw their previously issued guidance, instead of lowering it.


  • We suspect an unusually high proportion of companies coming out with negative pre-announcements following March 31st once they officially close their books on the calendar period. 


  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be up +3.0%, with all of the growth coming in the back half of the year. This is down from close to +8% at the start of the year.


  • The implied ‘EPS’ for the index, calculated using current 2020 P/E of 14.3Xand index close, as of March 16h, is $166.52, up from $161.69 in 2019. Using the same methodology, the index ‘EPS’ works out to $186.27 for 2021 (P/E of 12.8X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


We are almost four weeks away from the big banks really kicking off the 2020 Q1 reporting cycle, but a number of bellwether companies with fiscal quarters in February that get counted as part of the 2020 Q1 tally will start reporting in the next few days. Many of these early reporters like Adobe ADBE, Oracle ORCL, FedEx FDX and others will likely give us an early read on how the Q1 earnings season will unfold.

Estimates for 2020 Q1 have come down, as the chart below clearly shows.





As negative as this revisions trend looks, it is actually only modestly bigger than what we witnessed in the comparable periods over the preceding four quarters. In other words, the magnitude of negative revisions to Q1 estimates is hardly unusual when seen in a historical context, even if we go beyond the last few quarters.

Such a relatively ‘average’ decline in Q1 estimates runs counter to the actual and perceived disruptions to normal business activities by the global pandemic.

The explanation for this seeming disconnect is that many companies simply withdrew their earlier issued guidance as it was practically impossible for them to quantify the full extent of the pandemic’s impact. Guidance is important, as it serves as a reference point for sell-side analysts in coming up with their EPS estimates. This suggests that we will likely see an unusually busy pre-announcement season as companies close their books on the quarter on March 31st.

Estimates for 2020 Q2 have been coming down lately as well, but the same for the last two quarters of the year haven’t moved that much, as the chart below shows.





Earnings growth was expected to resume this year and accelerate next year. But that growth trajectory is now in doubt as a result of the global pandemic, as the revisions trend below shows.





The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected in the coming two years.





It is hard to have a lot of confidence in these expectations in the current backdrop of macroeconomic uncertainty, with the U.S. and global economic growth taking a severe hit from the pandemic.

A lot is riding on how the outbreak evolves in the coming weeks, which will determine the extent of the economic hit and the eventual turnaround. In best case scenario, the bulk of the economic impact is confined to Q2, with growth resuming in Q3 and accelerating toward the end of the year. Driving this view is the expectation is that the outbreak peaks in the late-April/early-May timeframe and starts subsiding thereafter. We will see if these expectations pan out, but the coming earnings season will be unusual in many ways.

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