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 have been coming down sharply as a result of the pandemic’s earnings impact. While the bulk of the estimate cuts are concentrated in Q2 and Q3, all four quarters of 2020 are now expected to suffer earnings declines relative to their respective year-earlier periods.
- For 2020 Q1, total S&P 500 earnings or aggregate net income is now expected to decline -8.6% from the same period last year. This is down from close to +4% growth expected in early January. This is a bigger decline than we have seen in the comparable periods in recent quarters.
- Q1 earnings are expected to be below the year-earlier level for 11 of the 16 Zacks sectors, with double-digit declines at Autos (-68.3% earnings decline), Aerospace (-36.9%), Energy (-42.4%), Basic Materials (-32.0%), Transportation (-39.1%), Industrial Products (-19.3%), Conglomerates (-12.4%), Consumer Discretionary (-19.8%) Retail (-11.5%) and Technology (-0.9%).
- Sectors with positive earnings growth in Q1 include Construction (+4.1%), Business Services (+4.9%), Medical (+1.0%), Consumer Staples (+0.7%), and Utilities (+2.0%).
- Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -16.4% and an -7.2% decline in Q3. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-101.8% decline in earnings), Autos (-115.6%), Transportation (-46.9%), Aerospace (-29.5%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-34.9%), Basic Materials (-27.5%), Industrial Products (-27.1%), and Conglomerates (-28.6%).
- Given the uncertain public health backdrop that is driving these estimates cuts, it is reasonable to expect still deeper cuts to estimates in the days and ahead, particularly as companies report Q1 results and share their outlook for underlying business conditions during these unusual times.
- For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -7.9% on -1.8% lower revenues. This is down from close to +8% at the start of the year. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.
- The implied ‘EPS’ for the index, calculated using current 2020 P/E of 18X and index close, as of April 7st, is $147.99, down from $160.70 in 2019. Using the same methodology, the index ‘EPS’ works out to $170.38 for 2021 (P/E of 15.6X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
- For the small-cap S&P 600 index, total Q1 earnings are now expected to be down -24.4% from the same period last year on +0.6% higher revenues. This would follow +2.3% earnings growth in the preceding period. The Q1 earnings growth picture would be even weaker had it not been for the strong growth in the Finance sector.
The big banks are on track to kick off the 2020 Q1 reporting cycle next week, but a number of bellwether companies with fiscal quarters in February that get counted as part of the 2020 Q1 tally have been reporting results already. Many of these early reporters like Adobe (ADBE - Free Report) , FedEx (FDX - Free Report) , Nike (NKE - Free Report) and others are giving us an early read on how the Q1 earnings season will likely unfold.
Estimates for 2020 Q1 have come down, as the chart below clearly shows.
This is a bigger decline than we have been seeing in the comparable periods in other recent quarters, primarily reflecting the impact of the pandemic.
The negative revisions trend is broad based, with estimates for 15 of the 16 Zacks sectors coming down. The Utilities sector is the only that has experienced a very modest increase in estimates.
Sectors with the biggest negative revisions include Energy, Aerospace, Autos, Basic Materials, Transportation and Consumer Discretionary. To get a sense of the magnitude of negative revisions suffered by the Energy and Aerospace sectors, take a look at the recent revisions trend for ExxonMobil (XOM - Free Report) and Boeing (BA - Free Report) .
Exxon is currently expected to report 23 cents in EPS for the March quarter, which is down from 66 cents a month ago. Similarly, Boeing is currently expected to lose $1.78 per share in Q1, down from estimates of $2.10 per share in positive earnings three months back.
Estimates for the following three quarters of 2020 have been coming down lately as well, with Q2 estimates now expected to decline at a double-digit percentage pace, as the revisions trend chart below shows.
The chart below presents expectations for Q1 and Q2 in the context of what was actually reported in the preceding periods and what is currently expected in the back half of the year.
We show later in this report the growth picture on an annual basis, where you will see a very strong growth expected next year and year after that.
We should keep in mind that analysts haven’t made a lot of changes to estimates for next year, currently showing a strong double-digit growth pace. But it 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 the best-case scenario, the bulk of the economic impact is confined to Q2, with growth trend stabilizing 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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