The unprecedented nature of the COVID-19 lockdowns and widespread withdrawal of corporate guidance has set up an unpredictable earnings season. The magnitude of the decline we are seeing may make this an earnings season to forget. As tough as it is to find a bright side in an estimated 40% collapse in S&P 500 Index earnings per share (EPS), it may be consoling that the season may be better than analysts’ estimates have suggested.
First, second quarter guidance has been better than average—55% of the guidance that has been provided has been negative, well below the five-year average of 69%, according to FactSet.
Second, recent economic data has mostly exceeded expectations, particularly for jobs and retail sales. The Citigroup Economic Surprise Index—a measure of the frequency that economic data is exceeding expectations—stands at a record high for the United States. Bloomberg’s version of the same measure is close to a record high.
And finally, earnings estimates for the second half of 2020 have been impressively stable in June and early July, which may increase the chances of more relative upside surprises. Consensus estimates for 2020 (FactSet) as of July 17 stood at $126.90, only marginally below the $127.66 estimate on June 1. We should keep in mind that more than one-third of the S&P 500 companies have withdrawn guidance during the pandemic.
During this unpredictable earnings season, there are a few key themes to watch:
- Caution over optimism. Although guidance has been less negative than normal for the second quarter and the economic rebound has exceeded expectations, the outlook for the economy and corporate America remain uncertain. Many states, particularly in the West and South, are struggling to contain the latest outbreak of COVID-19, while several other countries, notably Brazil and India, are still seeing steady increases in cases. Improving treatments and progress toward a vaccine are encouraging but expect companies to err on the side of being conservative.
- Finding a floor. Economic uncertainty may encourage companies to continue withholding guidance, as they did after first quarter results. This may leave analysts guessing and lead to a wide dispersion of company estimates. Whatever guidance we do get may give us a better sense of where the floor in earnings might be in case that the additional virus containment measures disrupt businesses in the coming months.
- Widening gap between winners and losers. Some companies have been largely unaffected by the COVID-19 pandemic, while others have been hard hit. Based on consensus estimates, the technology and healthcare sectors may see only modest single-digit percentage declines. The consumer discretionary and energy sectors, however, are expected to report losses—all profits are expected to be wiped out by the pandemic. The separation between the winners and losers continues to widen in this environment.
Given the amount of economic damage that has been done, even breakthroughs on treatments or vaccines may make a return to pre-pandemic levels of corporate profits unlikely in 2021. Fiscal policies will continue to evolve into and after the elections. How these policies affect corporate profits and consumer behavior in the next 12 to 24 months will determine how quickly we recover from the effects of the virus.
The views expressedare 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.