The Covid-19 pandemic and the associated shelter-in-place policies brought the U.S. economy to a standstill in April and May, with something resembling ‘normal’ activities only now getting underway in large parts of the country. Recent economic and labor market readings show that the pandemic’s most horrendous effects on the economy have started easing. The hope is that since the U.S. economy entered the pandemic in fairly good shape, we will get back to stronger economic growth in the coming months. While there is broad agreement in the market over this general view of the recovery, there is disagreement over the pace and magnitude of recovery. It is this aspect of the recovery debate that morphs into the letter shape that the recovery will take (the so-called ‘V’, ‘U’, ‘W’, or ‘L’ shapes). This debate about economic recovery has implications for corporate earnings, which along with interest rates, drives stock prices in the long run. Earnings estimates fell sharply as the pandemic’s full effects became clear, with full-year 2020 earnings estimate dropping from a roughly +8% growth in early January to a decline of -24.1% today. But the negative revisions trend has eased in recent weeks, which can be interpreted as reflecting the effects of the economy’s reopening. We will know more in the coming weeks as the Q2 earnings season gets underway and management teams share what they see on the ground in their respective industries. Management teams were completely clueless back in April when they reported Q1 results, with most withdrawing their previously issued public guidance. It is reasonable to expect relatively more clarity this time around, which should help anchor expectations for the second half and beyond. These expectations are captured in current consensus estimates, which we show below in the 5 charts. The first chart shows how S&P 500 earnings estimates for full-year 2020 have evolved since early January. As you can see below, the expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -24.1% decline, unchanged from last week.
The second chart shows how S&P 500 estimates have evolved for the current period (2020 Q2), which is expected to be the downturn’s bottom.
The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next four quarters contrasted with actuals for the preceding four periods; expectations for 2020 Q2 have been highlighted.
The fourth chart provides a big-picture view on an annual basis.
As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.8% relative to 2020 estimates. But as strong as next year’s growth estimate is, total 2021 index earnings would still haven’t gotten back to pre-Covid levels. In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the fifth chart below shows.
These numbers translate to an index ‘EPS’ of $155.18 in 2021 vs. $122.36 in 2020 and $161.21 in 2019. Q2 Earnings Season Gets Underway We mentioned earlier, the Q2 reporting cycle will (unofficially) get underway with the JPMorgan ( JPM Quick Quote JPM - Free Report) report on July 14th. But from our perspective, the Q2 earnings season has gotten underway already, with the Adobe ( ADBE Quick Quote ADBE - Free Report) report on Thursday, June 11th, as the third earnings release that we have results from 7 S&P 500 members already out. These 7 index members - including Costco ( COST Quick Quote COST - Free Report) , Oracle ( ORCL Quick Quote ORCL - Free Report) , Adobe and others - reported results for their fiscal quarters ending in May, which we count as part of official June-quarter tally. Nike ( NKE Quick Quote NKE - Free Report) , Accenture ( ACN Quick Quote ACN - Free Report) and Darden ( DRI Quick Quote DRI - Free Report) are among the 5 index members on deck to report results this week. By the time we JPMorgan reports its Q2 results on July 14th, we will have seen such results from almost two dozen S&P 500 members. For the 7 index members that have reported already, total Q2 earnings or aggregate net income is down -44.3% on -2.4% lower revenues, with 71.4% (5 out of 7) beating EPS estimates and 28.6% (2 out of 7) beating revenue estimates. This is too small a sample to draw any firm conclusions from. That said, the comparison charts below put these results in a historical context.
The summary table below shows Q2 expectations in the context of what we saw in the preceding period.
As you can see above, 15 of the 16 Zacks sectors are expected to have lower earnings relative to the year-earlier period, with 4 of the 16 sectors expected to lose money in Q2 (decline rates in excess of -100%). These three sectors are unsurprisingly Energy (Q2 earnings expected to decline -138.5%), Transportation (-152.9%), Autos (-224.8%) and Consumer Discretionary (-109.1%). Finance and Technology, the two biggest earnings contributors to the S&P 500 index, are expected to show Q2 earnings declines of -38.8% and -13.5%. In fact, Tech’s -13.3% decline is the smallest earnings decline of the 15 sectors that will experience declines in Q2 (Utilities is the only sector that is expected to show a modest growth). For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Q2 Earnings Season Preview
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