Zacks Earnings Trends Highlights: JPMorgan, Bank of America, Goldman Sachs and Citigroup

For Immediate Release

Chicago, IL – October 15, 2020 – Zacks Director of Research Sheraz Mian says, "For full-year 2020, total earnings for the S&P 500 index are currently expected to be down 20.2% on 4.7% lower revenues. As with Q3 estimates, full-year estimates have improved since early July."

Good Start to Q3 Earnings Season

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:

  • We are off to a good start in Q3 earnings season, with improved credit quality and continued capital markets momentum helping the banks come out with much improved results relative to the first half of the year.
  • For the 36 S&P 500 members that have reported Q3 results already, total earnings are down 14.1% from the same period last year on 1% lower revenues, with 88.9% beating EPS estimates and 75% beating revenue estimates.
  • This is a notably better performance than what we saw from the same group of 36 companies in the first half of the year.
  • For the Finance sector, we now have Q3 results from 29% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance companies are down 11% on 0.7% lower revenues, with 90% beating EPS estimates and 80% beating revenue estimates.
  • The big banks that will kick-start the Q3 earnings season for the Finance sector are expected to have fewer credit-quality issues relative to the first half, but overall profitability will remain constrained by a difficult interest rate environment, partly offset by continued momentum in capital markets businesses.
  • Looking at the quarter as a whole, total S&P 500 earnings are expected to decline 19.3% on 2.5% lower revenues. The growth picture has been steadily improving since early July, but the pace of improvement has started accelerating as companies have come out with better-than-expected results.
  • Sectors with the weakest Q3 growth outlook remain the social-distancing exposed spaces like Transportation (122.9% earnings decline), Energy (-106.3%), and Consumer Discretionary (-84.9%).
  • Out of the total 16 Zacks sectors, 14 sectors are expected to experience earnings declines in Q3, with Construction and Medical as the only sectors expected to show earnings growth.
  • Utilities (-3.3%), Technology (-4.2%) and Retail (-4.3%) are the sectors with the lowest expected earnings declines in Q3. The Finance sector’s current decline of 10.5% represents an improvement from the 23.1% decline expected before the banks started reporting results last week.
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down 20.2% on 4.7% lower revenues. As with Q3 estimates, full-year estimates have improved since early July.
  • Growth is expected to resume next year, thanks to easy comparisons, but the dollar level of earnings in 2021 will still be below the 2019 level.
  • The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 27.5X and index close, as of October 13th, is $127.60, down from $159.18 in 2019. Using the same methodology, the index ‘EPS’ works out to $159.18 for 2021 (P/E of 22.1X). The multiples for 2020 and 2021 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
  • Please note that while full-year 2021 earnings for the S&P 500 index are currently expected to be up +24.8% from the 2020 level, the absolute dollar amount of 2021 earnings estimates remain below the 2019 level.
  • For the small-cap S&P 600 index, Q3 earnings are expected to be down 38.9% from the same period last year on 7.2% lower revenues, which would follow a 65.3% decline on 17.9% lower revenues in 2020 Q2.
  • For full-year 2020, the S&P 600 index is expected to experience a 40.0% decline in earnings on 7.2% lower revenues, with easy comps pushing earnings growth to +45.2% in 2021.

The earnings outlook has been steadily improving since early July, as the U.S. economy started coming 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 raising their estimates for Q3 and beyond.

We are still at a very early stage in the Q3 reporting cycle, but we see the improving trend in the results that have come out. The big banks have handily beat estimates, with improving credit quality and the better-than-expected pace of economic recovery prompting the banks to book significantly lower reserves for loan losses relative to what they booked in the first half of the year.

For example, JPMorgan (JPM) booked only $611 million in reserves for loan losses for Q3, down from $10.47 billion in the preceding period. Similarly, Citigroup (C) booked $2.26 billion for Q3, down from $7 billion in each of the preceding periods. Bank of America’s (BAC) Q3 reserves of $1.39 billion were down from $5.12 billion in Q2.

The banks also benefited from continued momentum in the capital markets business, with gains on that front moderating a bit from the first-half level, but still up significantly from the year-earlier level. The capital markets business helped all the players, though it has had the biggest impact at Goldman Sachs (GS) that doesn’t have as much of the conventional banking business as its larger peers.

All in all, bank results have not only been better than expected, but represent notable improvements over what they reported in the first half of the year. The results that have come out have helped cut the Finance sector’s Q3 earnings decline by roughly one half to its current 10.5% decline. The likely explanation for bank stocks’ less-than-enthusiastic response to these results is their gains in the days ahead of these reports.

Looking at Q3 as a whole, combining the results that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to decline 19.3% from the year-earlier level on 2.5% lower revenues.

Looking at the outlook on an annual basis, index earnings are expected to decline -20.2% this year, after staying essentially flat last year. Growth is expected to resume next year, with easy comparisons driving most of the growth.

The recent flow of economic readings has been broadly positive, suggesting that the hoped-for recovery is firmly in place. This is showing up in earnings estimates as well, as indicated earlier. The hope is that this improving trend can be sustained even as the underlying health issue remains unresolved.

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