How Low Will Earnings Estimates Go?

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:

  • Estimates have been coming down sharply as analysts start coming to terms with the pandemic’s earnings impact. While the bulk of the estimate cuts are concentrated in Q2 and Q3, all four quarters of 2020 are now expected to suffer earnings declines relative to their respective year-earlier periods.


  • For 2020 Q1, total S&P 500 earnings or aggregate net income is now expected to decline -6.6% 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.


  • Q1 earnings are expected to be below the year-earlier level for 10 of the 16 Zacks sectors, with double-digit declines at Autos (-63.4% earnings decline), Aerospace (-34.4%), Energy (-40.4%), Basic Materials (-29.1%), Transportation (-33.9%), Industrial Products (-18.0%), Conglomerates (-12.1%), Consumer Discretionary (-14.7%) and Retail (-10.1%).


  • Sectors with positive earnings growth in Q1 include Technology (+0.6% earnings growth), Construction (+6.5%), Business Services (+5.6%), Medical (+2.0%), Consumer Staples (+0.5%), and Utilities (+1.5%).


  • Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -12.9% and an -11.8% decline in Q3. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-60.3% decline in earnings), Autos (-63.3%), Transportation (-55.6%), Aerospace (-32.2%). Other sectors with year-over-year earnings declines exceeding 20% include: Consumer Discretionary (-24.5%).   


  • 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 weeks 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 -4.4% on +0.1% higher revenues. This is down from close to +8% 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 16.7X and index close, as of March 31st, is $154.80, down from $161.94 in 2019. Using the same methodology, the index ‘EPS’ works out to $176.32 for 2021 (P/E of 14.7X). 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 -18.6% from the same period last year on -1.4% lower revenues. This would follow +1.8% 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.



We are a couple of weeks away from the big banks really kicking off the 2020 Q1 reporting cycle, but a number of bellwether companies with fiscal quarters in February that get counted as part of the 2020 Q1 tally have been reporting results already. Many of these early reporters like Adobe (ADBE), FedEx (FDX), Nike (NKE) and others are giving us an early read on how the Q1 earnings season will likely unfold.

Estimates for 2020 Q1 have come down, as the chart below clearly shows.





This is a bigger decline than we have been seeing in the comparable periods in other recent quarters, primarily reflecting the impact of the pandemic.

The negative revisions trend is broad based, with estimates for 15 of the 16 Zacks sectors coming down. The Utilities sector is the only that has experienced a very modest increase in estimates.

Sectors with the biggest negative revisions include Energy, Aerospace, Autos, Basic Materials, Transportation and Consumer Discretionary. To get a sense of the magnitude of negative revisions suffered by the Energy and Aerospace sectors, take a look at the recent revisions trend for ExxonMobil (XOM) and Boeing (BA).

Exxon is currently expected to report 25 cents in EPS for the March quarter, which is down from 62 cents a month ago. Similarly, Boeing is currently expected to lose $1.46 per share in Q1, down from estimates of $2.75 per share in positive earnings three months back.

Estimates for the next three quarters of 2020 have been coming down lately as well, with positive growth arriving in the first quarter of 2021, as the chart below shows.





The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected in the coming two years.





As you can see, full-year 2020 earnings growth is now in negative territory, with estimates likely to come down further as we get greater visibility on the pandemic’s economic damage.

Analysts haven’t made a lot of changes to estimates for next year, currently showing a strong double-digit growth pace. But it hard to have a lot of confidence in these expectations in the current backdrop of macroeconomic uncertainty, with the U.S. and global economic growth taking a severe hit from the pandemic. 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.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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