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Earnings Picture to Improve After Q2

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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:

  • The economic downturn resulting from the Covid-19 pandemic has caused a significant drop in corporate profitability, with S&P 500 earnings for this year now expected to be down by almost a quarter, with estimates still coming down.


  • Growth arrives next year, thanks to easy comparisons, but earnings in 2021 will still be below the 2019 level.


  • The brunt of the earnings hit is expected to be in Q2 2020, but declines are expected to continue in the second half of the year as well, though the pace of declines decelerates significantly from the Q2 level.


  • The Q1 earnings season has effectively come to an end, with results from 491 S&P 500 members out already. Total earnings or aggregate net income for these companies is down -13.1% on +1.3% higher revenues, with 66.4% beating EPS estimates and 57.4% beating revenue estimates.


  • This is a weaker showing than we have seen from the group in other recent periods and reflects the pandemic-related lockdowns that started coming effect towards the end of the quarter.


  • Tech sector profitability held up a lot better compared to other sectors, with Q1 earnings and revenues for the Tech companies up +5.1% and +4.0% from the year-earlier levels, respectively. An above-average proportion of Tech companies beat Q1 EPS and revenue estimates.


  • Bigger than expected credit costs to account for the economic downturn weighed heavily on the Finance sector’s Q1 profitability, which dragged down Q1 earnings growth for the S&P 500 index as a whole. 


  • For the Finance sector, total earnings were down -33.1% from the same period last year on +2.4% higher revenues, with only 55.8% of the sector companies beating EPS estimates and 60.0% beating revenue estimates.


  • Excluding the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies that have reported results would be down -7.0% (vs. -13.1% including the reported Finance results).


  • Other sectors with positive earnings growth in Q1 include Medical (+9.3%), Construction (+13.4%), Utilities (+5.7%) and Business Services (+8.7%).


  • Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -43.7% and Q3 expected to suffer a -26.2% decline. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-143% decline in earnings), Autos (-229.7%), Transportation (-152.0%), Aerospace (-59.5%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-92.0%), Basic Materials (-58.8%), Industrial Products (-53.3%), and Conglomerates (-73.3%).


  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -23.7% on -5.7% 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 25.0X and index close, as of June 2nd, is $123.05, down from $161.20 in 2019. Using the same methodology, the index ‘EPS’ works out to $155.45 for 2021 (P/E of 19.8X), modestly below the 2019 level ($161.20). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


  • Please note that while full-year 2021 earnings for the S&P 500 index are currently expected to be up +26.3% from the steadily lowered 2020 level, the absolute dollar amount of 2021 earnings estimates remains below the 2019 level.


  • For the small-cap S&P 600 index, total Q1 earnings are on track to be down -77.6% from the same period last year on -4.5% lower revenues. Earnings are expected to be down -82.8% in Q2, -40.2% in Q3 and -20.4% in Q4.


While the Covid-19 driven lockdowns have started to ease in different parts of the country, the pandemic’s economic and earnings impact will remain with us for a while. In fact, our analysis of consensus earnings estimates shows that overall profitability for the S&P 500 index will not go back to pre-Covid (the 2019 level) even in 2021, with major sectors like Energy, Transportation, Consumer Discretionary, Industrial Products and even Finance expected to earn less in 2021 than they did in 2019.

The body of this report contains detailed tables showing these aggregate numbers at the index level, but you can get a sense of earnings expectations for these sectors by looking at Zacks Consensus estimates for bellwether operators in sectors like Finance and Consumer Discretionary.

Take for example, the case of JPMorgan (JPM - Free Report) , which is currently expected to earn $5.13 per share this year, down from $10.72 last year. For 2021, the current Zacks Consensus EPS estimate is $8.79, down from $8.81 last week (vs. $10.72 per share earned in 2019).

Disney (DIS - Free Report) shares in the Consumer Discretionary sector have held up pretty well during this downturn, with the market crediting the stock for the streaming service, even though the lost earnings from theme parks and other businesses are far bigger than what the streaming service will bring in. In any case, it will take Disney till 2022 to get back to pre-Covid profitability levels.

But not every sector is expected to experience the earnings hit as the above companies and many others in these sectors are going through. The earnings declines for the Technology and Medical sectors this year are very modest and these sectors recoup those declines very quickly. As a result, 2021 earnings for the Tech and Medical sectors are expected to be up +8.4% and +14.3% over the 2019 levels, respectively.

No doubt, stocks in these spaces have been standout performers in the market’s rebound from the March 23rd low.

You can clearly see the 2021 vs. 2019 comparison in the chart below.









Unlike the level of earnings, the rate of change on a year-over-year basis will turn positive next year in a major way, as the chart below shows.









Economic readings for May clearly show that activity levels improved markedly from the April levels, with the bottom somewhere in April. The hope is that this steady improving trend will continue in the coming months as well, even though the underlying healthcare issue is still very much with us.

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 not only has the outbreak peaked already, but we are now likely better ‘trained’ to navigate it.

We will see if these expectations pan out.

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