The third-quarter 2020 earnings season that has commenced this week is likely to have strong implications on Wall Street after disappointing results for the coronavirus-hit second quarter.
Notably, the second quarter witnessed the worst earnings season since the great recession. Although earnings results are better than expected in the very early period of this cycle, the overall expectation is still negative.
Meanwhile, five corporate behemoths (market capital > $30 billion) with a favorable Zacks Rank are poised to beat earnings estimates next week. Investment in these stocks will be fruitful at this stage.
Q3 At a Glance
The third quarter marked by two underlining factors. One — the U.S. economic recovery, which witnessed a noticeable momentum in May and June, buoyed by the unprecedented fiscal and monetary stimulus by the U.S. government and the Fed, continued in July also.
Second, a series of economic data for August and September indicate that economic momentum has lost its pace. The primary reason for this slow pace of growth is the termination of the $2.2-trillion fiscal stimulus — popularly known as the CARES Act — at the end of July.
Both Republicans and Democrats have agreed to a second round of fiscal stimulus. The coronavirus woes continue to hurt the economy. Resurgence of COVID-19 infections in several states has compelled the U.S. economy to operate at a significant sub-optimal level. Moreover, lack of vaccine or a proper line of treatment has only worsened the situation.
Nevertheless, disagreements appear related to the size and scope of the aid package. Notably, the Democrats initially demanded a $3.4-trillion package which they later reduced to $2.2 trillion. Meanwhile, the Republicans initially offered a $1-trillion package, which was later increased to $1.8 trillion. No Congressional deal about a new fiscal stimulus has been reached to date.
Q3 Earnings Results So Far
The third-quarter earnings season has started on a strong note though overall earnings are likely to remain negative this quarter. As of Oct 14, 36 S&P 500 companies have reported results. Total earnings of these companies are down 14.1% from the same period last year on 1% lower revenues, with 88.9% beating EPS estimates and 75% surpassing revenue estimates.
Meanwhile, for the quarter as a whole, total S&P 500 earnings are expected to decline 19.3% on 2.5% lower revenues. This would be an improvement over an earnings decline of 22% year over year on 2.9% lower revenues, as projected before the starting of the reporting cycle. (Read More: Good Start to Q3 Earnings Season)
Our Top Picks
We have narrowed down our search to five large-cap stocks that are slated to release earnings results next week. Each of these stocks carries a Zacks Rank # 2 (Buy) and has a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are anticipated to appreciate after earnings releases. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The chart below shows the price performance of our five picks in the third quarter.
PPG Industries Inc. (PPG - Free Report) is a global supplier of paints, coatings, chemicals, specialty materials, glass and fiber glass. The company has an Earnings ESP of +4.35% for third-quarter 2020.
The Zacks Consensus Estimate for PPG Industries for the current year has improved 9.6% over the last 7 days. It has a trailing four-quarter earnings surprise of 13.1%, on average. The company is set to release earnings results on Oct 19, after the closing bell.
The Procter & Gamble Co. (PG - Free Report) provides branded consumer packaged goods to consumers in North and Latin America, Europe, the Asia Pacific, Greater China, India, the Middle East, and Africa. It operates in five segments: Beauty; Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The company has an Earnings ESP of +1.52% for first-quarter fiscal 2021 (ending September 2020).
The company has an expected earnings growth rate of 5.9% for the current year (ending Jane 2021). The Zacks Consensus Estimate for the current year has improved 0.4% over the last 7 days. It has a trailing four-quarter earnings surprise of 8.4%, on average. The company is set to release earnings results on Oct 20, before the opening bell.
Philip Morris International Inc. (PM - Free Report) manufactures and sells cigarettes, other nicotine-containing products, smoke-free products, and related electronic devices and accessories. The company has an Earnings ESP of +1.11% for third-quarter 2020.
The Zacks Consensus Estimate of Philip Morris for the current year has improved 0.2% over the last 30 days. It has a trailing four-quarter earnings surprise of 7.8%, on average. The company is set to release earnings results on Oct 20, before the opening bell.
Northrop Grumman Corp. (NOC - Free Report) is a security company, provides products in the areas of autonomous systems, cyber, space, strikes, and logistics and modernization in the United States, the Asia Pacific and internationally. It operates through four segments: Aerospace Systems, Innovation Systems, Mission Systems, and Technology Services.
The company has an Earnings ESP of +1.23% for third-quarter 2020. The company has an expected earnings growth rate of 5.9% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 60 days. It has a trailing four-quarter earnings surprise of 10.1%, on average. The company is set to release earnings results on Oct 22, before the opening bell.
Danaher Corp. (DHR - Free Report) designs, manufactures, and markets professional, medical, industrial, and commercial products and services worldwide. It operates through three segments — Life Sciences, Diagnostics, and Environmental & Applied Solutions. The company has an Earnings ESP of +2.56% for third-quarter 2020.
The company has an expected earnings growth rate of 24% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days. It has a trailing four-quarter earnings surprise of 10.8%, on average. The company is set to release earnings results on Oct 22, before the opening bell.
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