These 3 Charts Clearly Tell the Q2 Earnings Season Story

Thursday’s blowout Q2 results from Apple (AAPL), Amazon (AMZN), Facebook (FB) and even Alphabet (GOOGL) reconfirm the enormous earnings power of these technology players. This is particularly notable in the current uncertain macroeconomic environment that has weighed heavily on the profitability of older blue chips like Exxon (XOM), Coke (KO), Boeing (BA) and others.

These impressive Tech sector results show that the market’s preference for these stocks has a fundamental basis. No doubt the aforementioned four Technology stocks, coupled with Microsoft (MSFT), now account for 22.5% of the S&P 500 index’s total market capitalization, second only to the Technology sector and bigger than the Finance sector.

The following three charts do a good job of showing the key trends that have unfolded this reporting cycle.

The takeaway from the first chart is that analysts were totally in the dark as they set their Q2 EPS and revenue estimates and ended up being conservative. As we all know, most companies withdrew previously issued guidance given how difficult it was to project business trends during the period because of the pandemic.

The chart shows the proportion of the 313 S&P 500 companies that have reported through Friday, July 31st, beating EPS and revenue estimates.












As you can see above, 56.9% of the S&P 500 members are beating both EPS and revenue estimates.

We knew that the pandemic dealt a severe blow to corporate profitability and the results of the 313 S&P 500 companies gives us a good idea of the magnitude of that growth hit. The second chart compares the year-over-year earnings and revenue growth for these 313 index members with what we had seen from the 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 313 S&P 500 members are down -36.2% on -7.8% lower revenues. To round out this scorecard, 79.9% of these 313 index members have beaten consensus EPS estimates and the corresponding revenue beats percentage is 65.2%, with a blended beats percentage of 56.9%.

Please note that we have super-busy docket of earnings releases as well, with more than 1,200 companies reporting results, including 133 S&P 500 members.

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 -24.3% 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 notable improvement in the overall earnings picture since the start of the pandemic.

Tech Sector Scorecard

For the Tech sector, we now have Q2 results from 82.9% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Tech companies are down -1.8% on +2.5% higher revenues, with 90.2% beating EPS estimates and 80.5% beating revenue estimates.

The comparison charts below put these results in a historical context and go some ways towards showing that the sector’s Q2 results appear to be out of sync with what’s plaguing all the other sectors during the Covid-19 pandemic.

The first set of comparison charts is of the Q2 earnings and revenue growth rates.










The second set of comparison charts shows Q2 EPS and revenue beats percentages in the context of recent history.











Looking at Q2 as a whole for the Tech sector, total sector earnings are expected to be down -3.2% from the same period last year on +3.2% higher revenues. This is the lowest earnings decline rate of the 14 Zacks sectors that are expected to have year-over-year earnings declines in the quarter (Utilities is the only sector with a modest positive growth and Medical is flat from the year-earlier level).

Looking at the index as a whole, combining the actual results from the 313 index members with estimates for the still-to-come companies, total Q2 earnings are expected to decline -36.1% from the same period last year on -6.9% lower revenues.

The summary table below shows Q2 expectations in the context of what we saw in the preceding period.











As you can see above, all 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 four sectors are unsurprisingly Energy (Q2 earnings expected to decline -155.4%), Transportation (-146.3%), Autos (-124.8%) and Consumer Discretionary (-108.6%).

The chart below 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 following chart takes a similar 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 +26.4% 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.

For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> An Improving Earnings Outlook Despite Covid-19 Concerns

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