Improving Economic Momentum Driving Earnings Gains
The improving trend in the overall earnings picture that we have identified since mid-July remains in place, though the pace of favorable estimate revisions has eased a bit in recent days as the Q2 earnings season has moved towards the finish line.
Earnings in the June quarter were down roughly a third from the same period last year as a result of the Covid-19 pandemic. But that’s actually modestly better than what was expected through early July. Importantly, estimates for the current period (2020 Q3) and beyond have been steadily going up, though they still represent big declines from the year-earlier periods.
All of this is consistent with what we are seeing in macroeconomic data that shows the U.S. economy steadily coming out of the pandemic-driven downturn. We saw this in Friday’s August PMI surveys that not only show that the recovery is gaining momentum despite the summer surge in infections, but also that the U.S. recovery appears to be outpacing Europe and other regions of the world.
It is this fundamental momentum that is driving the major stock indexes into record territory. That said, the recovery needs continued fiscal support, which has started waning in recent weeks. The hope is that Congress passes the next round of relief measures after it comes back from the summer recess. Any slip up on that front likely remains a risk factor for the economy and the market.
Beyond the macro issues, we discuss the overall earnings story that emerged out of the Q2 earnings season, now winding down, through the following charts.
Please note that through Friday, August 21st, we have seen Q2 results from 476 S&P 500 members or 95.2% of the index’s total membership. We have another 15 index members on deck to report results this week, including Best Buy (BBY), Dollar General (DG), Ulta Beauty (ULTA) and others.
The takeaway from the first chart is that analysts were totally in the dark as they set their Q2 EPS and revenue estimates. As we all know, most companies withdrew previously issued guidance given how difficult it was project business trends during the period because of the pandemic.
The chart shows the proportion of the 476 S&P 500 companies that have reported through Friday, August 21st, beating both EPS and revenue estimates.
As you can see above, an above average 56.5% of the S&P 500 members have beaten both EPS and revenue estimates.
The second chart compares the year-over-year earnings and revenue growth for these 476 index members with what we had seen from the same cohort of companies in other recent periods. Please note that when we say ‘earnings’, we mean aggregate net income, not mean or median EPS.
What this chart is showing is that total earnings (or aggregate net income) for the 476 S&P 500 members are down -33.4% on -9.7% lower revenues. To round out this scorecard, 80% of these 476 index members have beaten consensus EPS estimates and the corresponding revenue beats percentage is 63.4%, with a blended beats percentage of 56.5%.
The third chart shows how estimates for the current period (2020 Q3) has evolved since the Q2 earnings season got underway.
As you can see above, Q3 earnings for the S&P 500 index are currently expected to decline -23.9% from the same period last year. But the growth picture has been steadily improving since the start of July. We see a similar trend in place for 2020 Q4 and full-year 2020 estimates as well.
This is a notable improvement in the overall earnings picture since the start of the pandemic and is in-line with high-frequency macroeconomic data that is showing a similar improvement in the economy’s growth drivers.
The question at this stage is the extent of damage to this improving trend as a result of Congress’ inability to extend the pandemic-related relief measures that played a critical role in stabilizing the economic picture.
The fourth chart below takes a big-picture view of the quarters, showing Q2 earnings and revenue growth in the context of what was actually achieved in the last few quarters and what is expected in the coming periods. Please note that the Q2 earnings and revenue growth figures in this chart represent the blended numbers for the quarter, not just the reports that have come out already.
The fifth chart below presents the big-picture view on an annual basis. As you can see below, 2020 earnings and revenues are expected to be down -21.3% and -5%, respectively.
As would be expected, 2020 estimates came down as the pandemic unfolded, with the current -21.1% decline down from +7.9% growth at the start of the year. But as mentioned earlier in the context of 2020 Q3 estimates, the revisions trend lately has been positive, as the chart below shows.
For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Earnings Season Winding Down
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