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:
- Bank quarterly reports give us a sense of the earnings hit we have suffered as a result of this pandemic whose full impact will only show up in Q2. We are seeing this impact in the sharply falling estimates for Q2 and full-year 2020.
- For the Finance sector, we now have Q1 results from 28.8% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Finance companies are down -56.3% from the same period last year on -1.2% lower revenues, with only half of the sector companies beating EPS and revenue estimates.
- The Finance sector’s Q1 results are notably weaker than we have seen from the group in other recent periods and reflects banks’ cyclical exposure to deterioration in credit conditions that is showing up in growing provisions for loan losses. This gives us an advanced reading on what to expect from other sectors this earnings season.
- For Q1 as a whole, total S&P 500 earnings or aggregate net income is now expected to decline -13.9% 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.
- For the Finance sector, Q1 earnings are now expected to be down -24.3% from the same period last year, with declines in that vicinity expected to continue in the following two quarters well.
- Q1 earnings are expected to be below the year-earlier level for 11 of the 16 Zacks sectors, with double-digit declines at Autos (-71.9% earnings decline), Aerospace (-41.3%), Energy (-47.6%), Basic Materials (-32.8%), Transportation (-60.2%), Industrial Products (-21.2%), Conglomerates (-16.9%), Consumer Discretionary (-22.6%), Finance (-24.3%), Retail (-14.1%) and Conglomerates (-16.9%).
- Sectors with positive earnings growth in Q1 include Construction (+12.1%), Business Services (+4.5%), Medical (+1.9%), Consumer Staples (+0.7%), and Utilities (+2.0%).
- Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -24.4% and an -11.8% decline in Q3. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-106.1% decline in earnings), Autos (-134.1%), Transportation (-97.2%), Aerospace (-39.0%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-46.5%), Basic Materials (-29.1%), Industrial Products (-35.4%), and Conglomerates (-34.2%).
- 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 -13.2% on -2.9% lower revenues. This is down from close to +8% growth expected 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 20.3X and index close, as of April 14th, is $140.52, down from $161.88 in 2019. Using the same methodology, the index ‘EPS’ works out to $167.89 for 2021 (P/E of 17X). 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 -29.7% from the same period last year on -2.6% lower 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.
First Quarter earnings at JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) and Bank of America (BAC - Free Report) are down -68.8%, -46.1%, and -45.2% from the year-earlier level, respectively. Driving these declines are rising loan loss provisions at these banks that reflect the banks’ outlook for losses on their loan portfolios.
Banks are cyclical businesses and remain significantly exposed to the ongoing pandemic-driven downturn in the U.S. economy whose full impact is expected to show up in Q2 before starting to stabilize and improve in Q3. The hits to bank profitability come not only from reduced demand for the group’s services, but also from margins as a result of lower interest rates. Importantly, the banks’ assets, meaning its loan portfolio, starts to deteriorate in an economic downturn as its customers find it difficult to service their debts.
The aforementioned loan-loss provisions that JPMorgan and others have taken in their Q1 reports are to account for this deterioration in credit quality. But with the full impact of the lockdown expected to show up in the next couple of months, it is reasonable to envision banks adding further to their reserves going forward.
This is evolving economic picture is showing up in consensus earnings estimates for Q2 and beyond, as the chart below shows.
With Q2 expected to be the ground zero for the lockdown’s economic impact, two of the 16 Zacks sectors are expected to lose money in the quarter. These are Energy and Autos, whose Q2 earnings are expected to be down -106.1% and -134.1% from the year-earlier level, respectively.
The Transportation sector’s Q2 earnings are expected to barely in positive territory, with the sector expected to suffer -97.2% decline in earnings. Other sectors with year-over-year earnings declines include Consumer Discretionary (-45.2%), Basic Materials (-29.1%), Industrial Products (-35.4%), Conglomerates (-34.2%), Aerospace (-39%), and Finance (-26.4%).
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.
The chart below shows the growth picture on an annual basis. As you can see, estimates for this year are going down in a major way.
There is a big question mark over estimates for this year and beyond, as they reflect assumptions about the duration of the downturn that is unknowable at this stage, given its public health driver. 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.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>