Earnings came in much better than expected. With all of S&P 500 Index companies having reported results, the average upside surprise has been 22%, which is probably the highest ever recorded going back several decades. At 82%, the percentage of S&P 500 companies that beat earnings targets is the highest since FactSet began tracking that statistic in 2008. Keep in mind, though, earnings are still tracking to a significant 27% year-over-year decline, and Price/Earnings multiples have increased since then.
Estimates were off principally due to the lack of guidance from companies’ management teams. Additional reasons which may have played a role include:
- Analysts underestimated companies’ ability to cut costs.
- Analysts were surprised by the economy’s ability to bounce back as states reopened.
- Analysts underestimated the size and impact of fiscal and monetary stimulus.
- US dollar weakness provided an unexpected tailwind for multinationals’ profits.
- Companies that provided guidance had every reason to be conservative, given
the uncertainty.
The top five takeaways from second quarter results are:
- The earnings decline came from four sectors. The four sectors that have been among the hardest hit during the pandemic—consumer discretionary, energy, financials, and industrial --drove the entire earnings decline for the S&P 500. Seven S&P 500 sectors were essentially flat in one of the worst quarters for the US economy in 100 years.
- The best pandemic performers were mostly on the growth side. The Russell 1000 Growth Index is tracking to a 4% year-over-year increase in earnings for the second quarter. Meanwhile earnings for the Russell 1000 Value Index are tracking down 40% year over year. The so-called “stay-at-home” stocks, whose leadership positions have strengthened during the pandemic, are mostly found in the growth indexes— big cap technology and internet stocks.
- Estimates for future quarters tend to fall as earnings are reported. This past quarter was a different story, with a 1.4% increase in the next 12 months’ S&P 500 earnings estimates since the second quarter ended, reflecting improved guidance from Corporate America. While that may not seem like much, and still positive earnings growth may not occur until early 2021, this encouraging development increases the chances that estimates for the third and fourth quarters may prove to be low.
- The dollar has been weakening. The nearly 5% drop in the US Dollar Index so far in the third quarter boosts internationally sourced profits for US multinationals and bodes well for the near-term earnings outlook.
This recent good news should not be a signal to investors to be more aggressive with equities for several reasons: a pullback may be overdue. The election could drive volatility. The next leg of the economic recovery may get tougher. US-China tensions remain. And, the stock market may be disappointed if lawmakers cannot agree on another stimulus package. Also, the earnings that pleasantly surprised from very reduced expectations do not provide much impetus to revalue the S&P 500 higher.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial, FactSet and Bloomberg LP.
- All investing involves risk including loss of principal.
- All indices are unmanaged and cannot be invested into directly.