For Immediate Release
Chicago, IL – December 10, 2020 – Zacks Director of Research Sheraz Mian says, “With a vaccine rollout on the horizon, we feel that U.S. economic growth will turn out to be stronger than the current consensus growth estimate of +3.8% for 2021."
First Look Ahead to Q4 Earnings Season
Here are the key points:
With the Q4 earnings season ahead of us, the focus will be on expectations for full-year 2021 after the pandemic-plagued 2020. Estimates have been going up since early July, with S&P 500 earnings for the year expected to be up +21.6%. With a vaccine rollout on the horizon, we feel that U.S. economic growth will turn out to be stronger than the current consensus growth estimate of +3.8% for 2021. As such, we see earnings estimates going up in a meaningful way to catch up with the improving economic reality as we go through the first half of 2021. For 2020 Q4, S&P 500 earnings are expected to be down -11.2% on +0.2% higher revenues, which would follow -7.8% earnings decline in Q3 on -1% lower revenues. Overall, 11 of the 16 Zacks sectors are expected to experience earnings declines in Q4, with Transportation (-102.3% decline), Energy (-90.4%), Consumer Discretionary (+71.7%) and Conglomerates (-14.2%) as the big decliners. For the Finance sector, Q4 earnings are expected to be down -9% on -3.3% lower revenues, which would follow declines of -11.7% in 2020 Q3, - 45.2% in Q2, and -32.6% in Q1. For the Technology sector, Q4 earnings are expected to be down -0.7% on 9% higher revenues, which would follow the +10% earnings growth in Q3. Sectors with positive earnings growth in Q4 include Construction (+21.5% earnings growth), Autos (+59.8%), Medical (+6%), Basic Materials (+6.3%) and Aerospace (+4.9%). Looking at the calendar-year picture for the S&P 500 index, earnings are expected to decline -16.9% on -3.8% lower revenues in 2020 and increase +21.6% on +7.4% higher revenues in 2021. Estimates for both years have been going up. The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 27.8X and index close, as of December 8th, is $133.00, down from $160.04 in 2019. Using the same methodology, the index ‘EPS’ works out to $161.77 for 2021 (P/E of 22.9X). 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, Q4 earnings are projected to fall -17.3% on -2.6% lower revenues. For full-year 2020, the S&P 600 index is expected to experience a -29.9% decline in earnings on -10.5% lower revenues, with easy comps pushing earnings growth to +35.7% in 2021. The overall earnings picture started improving in July, as the U.S. economy came out of the pandemic-driven slump. While pockets of entrenched weakness remain, the pace and magnitude of the recovery has largely been better than expected. This improving trend has been showing up in positive estimate revisions, with analysts steadily raising their estimates. We saw this earlier with Q3 estimates and we are seeing the same trend in play for Q4 estimates as well. Estimates have largely been stable over the last few weeks, with the current -11.2% expected decline in Q4 for the last two weeks. This could be reflective of the negative effects of surging infection rates in the country at present, which has been showing in some of the more recent economic data as well. But we suspect the moderation or stalling trend in estimate revisions is likely just a seasonal phenomenon, reflecting the quiet period between earnings releases. We will start seeing the early Q4 results in the coming days, as companies with fiscal quarters ending in November start reporting results. We have already seen the AutoZone, Inc. ( AZO Quick Quote AZO - Free Report) earnings release, with FedEx Corporation ( FDX Quick Quote FDX - Free Report) , NIKE, Inc. ( NKE Quick Quote NKE - Free Report) , Oracle Corporation ( ORCL Quick Quote ORCL - Free Report) and others on the docket in the next few days. We strongly feel that the positive revisions trend that we have been seeing over the last few months will pick up again as more companies report quarterly results and discuss their outlook for the coming periods. We remain positive in our earnings outlook, as we see the full-year 2021 growth picture steadily improving as more through the first half of the year and the population gets vaccinated. We strongly feel that current consensus economic growth projections reflect learned experience of economic recoveries from the last few recessions.
We don’t think that this recovery will follow this past pattern as this downturn was fundamentally different. As such, we see significant upside to current consensus GDP growth estimates of +3.8% for 2021, which drives our favorable earnings outlook for the year and beyond.
The flow of economic readings continues to be favorable, though the pace of the recovery in the current period will be significantly below Q3’s break-neck speed moderate. The hope is that the recovery in the economy, as well as the earnings outlook doesn’t lose pace in the face of rising infections and delayed fiscal relief. Beyond the Q4 earnings season, the outlook remains positive. The Report in Detail
Note: This report has six sections. The first section, titled Q3 Season Scorecard, provides a real-time update of the earnings season, puts the results thus far in a historical context, and highlights the major sectors.
The second section, titled the Blended Picture, presents the composite or blended Q3 expectations by combining the actual results that have come out with estimates for the still to come companies. The Third section, titled the Context, puts the blended Q3 expectations in the context of what was actually reported in the preceding quarters and what is expected in the coming quarter(s).
This section provides both earnings and revenues on a quarterly basis, both the dollar amounts as well as the year-over-year growth rates. The fourth section, titled Annual Data, presents the earnings and revenues data on an annual basis. The fifth section, titled Small-Cap Earnings, presents the earnings picture for the S&P 600 index. The final section visually presents the market capitalization and earnings contribution of the 16 Zacks sectors.
Section 1 – Q4 Earnings Season Scorecard
AutoZone became the first S&P 500 member when it reported Q4 results Tuesday, December 8th. The company reported results for its fiscal quarter ending in November, which we count as part of our Q4 tally. Results from Oracle, Adobe, FedEx and Nike and others in the coming days will similarly be for their respective November fiscal quarters, but we will be counting them as part of our Q4 tally.
In fact, we will have seen roughly two dozen such November quarter results before JPMorgan kicks off the Q4 earnings season for the big banks on January 15th. Section 2 – The Blended Picture
Looking at Q4 as a whole, total earnings or aggregate net income for the S&P 500 index are expected to be down -11.2% from the same period last year on +0.2% higher revenues.
All the earnings analysis in this report pertains to the S&P 500 index, a handy proxy for the entire business world. We use the index’s current membership as the basis for all period comparisons, meaning that even historical periods reflect the index’s current membership.
We divide the corporate world into 16 sectors compared to the official S&P 11 GICS. We have stand-alone sectors like Autos, Construction, Conglomerates, Aerospace, Transportation and Business Services that provide for a better understanding of trends in these key areas of the economy.
All references to ‘earnings’ mean ‘total earnings’ or ‘aggregate net income’ and not ‘mean or median EPS.’
We make adjustments to reported GAAP earnings to account for non-recurring or one-time items, but we do consider employee stock options (ESOs) as a legitimate business expense. Unlike Zacks, Wall Street and all other data vendors don’t treat ESO’s as a recurring business expense. Q4 earnings are expected to be below the year-earlier level for 11 out of the 16 Zacks sectors, with double-digit declines in 4 sectors and one sector expected to lose money (decline in excess of 100%). This marks an improvement from Q3 in terms of sectors projected to post big declines. The Transportation sector lost money in Q3, with an -116.8% earnings decline. The sector’s outlook isn’t expected to improve much in Q4 either, with earnings for the sector expected to be down -102.3%. This reflects the continued operating woes of the airline space, which has been hit hard by the Covid-19 pandemic. Other sectors with big earnings declines in Q4 are projected to include Energy (-90.4%), and Consumer Discretionary (-71.7%). The five sectors with positive earnings growth in Q3 include: Construction at +21.5%, Medical at +6.0%, Autos at +59.8%, Aerospace +4.9%, and Basic Materials +6.3%. Earnings growth for the index declines to -15.3% from -11.2% on an ex-Technology basis, but improves to -8.3% on an ex-Energy basis. The Q2 level represented the depth of the earnings hit, with the picture steadily improving in Q3 and beyond but still remaining below pre-Covid levels. The Energy sector continues to struggle, with oil prices trying to come to grips with falling demand and growing supplies. The sector did better than last quarter when it lost money, with Q4 earnings declining -90.4% below the year-earlier level. Total Tech sector earnings are projected to dip -0.7% in Q4 on +9.0% higher revenues, which will follow an earnings growth of +10.0%% on +6.7% higher revenues in the preceding quarter (2020 Q3). The Tech sector’s earnings growth and the overall level of earnings have held up a lot better during the Covid-19 downturn, as the charts below show. Finance sector earnings are projected to decline -9.0% on -3.3% lower revenues in Q4, which follows the -11.7% earnings decline on +0.6% higher revenues in 2020 Q3. Section Three - The Context
Let’s take a look at earnings expectations for 2020 Q4 compared to what companies earned in the last few quarters and what they are expected to earn in the coming quarters.
It may be obvious, but it’s still useful to explain what we mean by total earnings. This means the sum of net income for all companies in the S&P 500. For historical periods through 2020 Q3, we have taken the total earnings (net income, not EPS) for each company in the S&P 500 and added them up to arrive at the sector and index level totals (we do adjust reported GAAP earnings for non-recurring items, but consider employee stock options as a legitimate business expense). For the coming quarters, including Q4, we have taken the Zacks Consensus EPS for each company in the index, multiplied by the corresponding share count (from the last reported quarter) to arrive at the total earnings for each company. And then we aggregated them to arrive at the totals for each sector and the index as a whole. The lack of accuracy in real-time share count notwithstanding, this gives us a fairly accurate view of the total earnings picture. Section 4 - Annual Earnings
Earnings estimates for full-year 2020 came down as the pandemic unfolded, with the revisions trend turning positive since early July, as mentioned earlier. Total earnings or aggregate net income for the S&P 500 index are expected to down -16.9% on a -3.8% decline in revenue.
The Margins Picture
Net margins (aggregate net income divided by aggregate revenues) are expected to be 10.1% in Q4, down from 11.2% 2020 Q3 and from 11.4% in 2019 Q4.
Looking at net margins on an annual basis, full-year 2020 margins are expected to reach 9.9%, below 2019’s 11.4% and 2018’s 11.9%. The expectation is for margins to climb to 11.2% in 2021, and rise again the following year to 12.3%.
Corporate margins are down in Q1, but expected to bottom in Q2 and make a strong recovery from Q3 onwards. On an annual basis, margins are expected to take a hit this year, but bounce back next year and continue expanding in 2022. Section 5 - The Small-Cap Data – S&P 600 Index
Total earnings or aggregate net income for the S&P 600 in Q4 are projected to decline -17.3% from the same period last year on -2.6% lower revenues
. The Detailed Small-Cap Earnings Picture (S&P 600)
Let’s take a look at how consensus earnings expectations for 2020 Q4 compare to what companies earned in the last few quarters and what they are expected to earn in the coming quarters.
Total Quarterly Revenues
Looking at the small-cap index on an annual basis, total 2020 earnings are expected to be down -29.9% on -10.5% lower revenues, with positive growth expected to resume the following year, largely reflecting easy comparisons.
Section 6: Market Cap vs. Total Earnings
The Finance and Technology sectors account for the lion’s share of the index’s total market capitalization and also bring in a big proportion of its total earnings. Technology is by far the biggest earnings contributor, accounting for 27.7% of the index’s total earnings and 31.9% of its total market capitalization. The Finance sector now accounts for only 12.8% of the index’s total market capitalization, but it is expected to bring in 19.6% of the index’s total forward 12-month earnings.
Relative market cap weights in the small-cap S&P 600 index are totally different from the large-cap index. The Finance sector accounts for 39.1% of the small-cap index’s earnings, which is a big reason why the small-cap index has such a weak growth profile currently. The small-cap index also has a much smaller weightage and earnings contribution from the Technology sector at 9.9% of earnings, which has held up a lot better during this pandemic.
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