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:
- Earnings estimates fell sharply in the immediate aftermath of the Covid-19 pandemic, with full-year 2020 estimates now almost a quarter below the year-earlier level and even 2021 estimates now modestly below the 2019 level.
- The massive negative revisions trend of the last three months appears to have eased in recent days, but that could change as companies start reporting June-quarter results next month and provide guidance.
- Total S&P 500 earnings are expected to decline -44.1% in Q2 on -10.9% lower revenues, with the Utilities sector as the only one expected to have modestly higher earnings relative to the year-earlier period.
- The brunt of the Covid-19 earnings hit is expected to be in Q2 2020, but declines are expected to continue in the second half of the year as well, though the pace of declines decelerates significantly from the Q2 level.
- The four sectors that are expected to lose money in Q2 (year-over-year declines of -100% or more) are Energy (-139.4% earnings decline), Autos (-226.1%), Transportation (-151.2%) and Consumer Discretionary (-109.1%).
- Other sectors expected to suffer big earnings declines in Q2 include Conglomerates (-73.3%), Aerospace (-61.0%), Basic Materials (-57.3%), Industrial Products (-52.9%), Retail (-42.1%) and Finance (-39.0%).
- The Technology sector stands out for having a lower earnings decline in Q2 relative to other sectors, with total earnings for the sector expected to decline -13.5% from the year-earlier period on -1.2% lower revenues.
- For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -24.2% on -5.7% lower revenues. This is down from close to +8% growth expected at the start of the year. For reference, S&P 500 earnings declined -19.1% in 2008 and -3.4% in 2009, though that was admittedly a different type of downturn.
- Growth arrives 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 index, calculated using current 2020 P/E of 25.6X and index close, as of June 23rd, is $122.20, down from $161.18 in 2019. Using the same methodology, the index ‘EPS’ works out to $155.14 for 2021 (P/E of 20.2X), modestly below the 2019 level ($161.18). 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 +27.0% 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, total Q2 earnings are projected to be down -85.5% from the same period last year on -15.9% lower revenues. This would follow an earnings decline of -82.1% in Q1 on -7.6% lower revenues.
While the Covid-19 driven lockdowns have started to ease in different parts of the country, the pandemic’s economic and earnings impact will remain with us for a while. In fact, our analysis of consensus earnings estimates shows that overall profitability for the S&P 500 index will not go back to pre-Covid level even in 2021, with major sectors like Energy, Transportation, Consumer Discretionary, Industrial Products and even Finance expected to earn less in 2021 than they did in 2019.
The Covid-19 earnings impact is not uniformly distributed across all sectors, with Technology and Medical expected to perform reasonably well. The earnings declines for the Technology and Medical sectors this year are very modest and these sectors are expected to recoup those declines very quickly. As a result, 2021 earnings for the Tech and Medical sectors are expected to be up +8.6% and +12.6% over the 2019 levels, respectively.
No doubt, stocks in these spaces have been standout performers in the market’s rebound from the March 23rd lows. The strong performance from some of the largest Technology companies during the pandemic is an acknowledgement of these companies’ earnings power.
Five S&P 500 companies - Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), Facebook (FB) and Apple (AAPL) – now account for 22.5% of the index’s total market capitalization. This is significantly above these companies’ earnings contribution to the index’s total, expected to be 14.5% of the total this year. But this earnings contribution is up from 10.5% in 2019.
The Covid-19 earnings impact can clearly be seen in the chart below.
Unlike the level of earnings, the rate of change on a year-over-year basis will turn positive next year in a major way, as the chart below shows.
Economic readings in recent days for May clearly show that activity levels improved markedly from the April levels, with the bottom somewhere in April. The hope is that this steady improving trend will continue in the coming months as well, even though the underlying healthcare issue is still very much with us.
In the best-case scenario, the bulk of the economic impact is confined to Q2, with growth stabilizing in Q3 and accelerating toward the end of the year. Driving this view is the expectation is that not only has the outbreak peaked already, but we are now likely better ‘trained’ to navigate it.
We will see if these expectations pan out.
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