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Covid-19 Impact on Earnings to Linger Through 2021

Sheraz Mian

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:

  • The Covid-19 pandemic has caused a significant drop in corporate profitability, with S&P 500 earnings for full-year 2020 now expected to be down -23.3%, with estimates still coming down.

 

  • Growth is expected to resume next year, largely a function of easy comparisons, as overall profitability in 2021 is expected to remain below the 2019 level.

 

  • The brunt of the earnings hit is expected to be in the current period (2020 Q2), 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 Q1 earnings season has effectively come to an end, with results from 464 S&P 500 members out already. The Retail sector is the only one that has a number of reports still to come, but the reporting cycle has ended for 9 of the 16 sectors. 

 

  • For the 464 S&P 500 members that have reported Q1 results, total earnings or aggregate net income is down -11.2% on +1.9% higher revenues, with 67.0% beating EPS estimates and 57.8% beating revenue estimates.

 

  • This is a weaker showing than we have seen from the group in other recent periods and reflects the pandemic-related lockdowns that started coming into effect towards the end of the quarter.

 

  • For the Retail sector (91.7% of the sector’s market cap in the S&P 500 companies that have reported), total Q1 earnings are down -14% on +9.5% higher revenues, with 66.7% beating EPS estimates and 87.5% beating revenue estimates.

 

  • Tech sector profitability has held up a lot better compared to other sectors, with Q1 earnings and revenues for the Tech companies that have reported up +5.2% and +4.9% from the year-earlier levels, respectively. An above-average proportion of Tech companies have beaten Q1 EPS and revenue estimates.

 

  • Bigger than expected credit costs to account for the economic downturn have weighed heavily on the Finance sector’s profitability, which is dragging down the overall Q1 earnings growth pace for the S&P 500 index.  

 

  • For the Finance sector, total earnings are down -33.1% from the same period last year on +2.4% higher revenues, with only 55.8% of the sector companies beating EPS estimates and 60.0% beating revenue estimates.

 

  • Excluding the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies that have reported results would be down -4.0% (vs. -11.2% including the reported Finance results).

 

  • Other sectors with positive earnings growth in Q1 include Medical (+12.6%), Construction (+13.4%), Utilities (+14.5%) and Business Services (+9%).

 

  • Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -42.6% and Q3 expected to suffer a -25.3% decline. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-141.7% decline in earnings), Autos (-228.0%), Transportation (-152.7%), Aerospace (-59.2%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-85.6%), Basic Materials (-58.6%), Industrial Products (-53.2%), and Conglomerates (-73.2%).

 

  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -23.3% on -5.5% 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.

 

  • The implied ‘EPS’ for the index, calculated using current 2020 P/E of 23.6X and index close, as of May 19th, is $123.69, down from $161.23 in 2019. Using the same methodology, the index ‘EPS’ works out to $156.29 for 2021 (P/E of 18.7X), modestly below the 2019 level ($161.23). 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 +26.4% from the steadily lowered 2020 level, the absolute dollar amount of 2021 earnings estimates are now modestly below the 2019 level.

 

  • For the small-cap S&P 600 index, total Q1 earnings are now expected to be down -69.2% from the same period last year on -3.0% lower revenues. This would follow +1.2% earnings growth in the preceding period.

 

 

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 is not expected to go back to the 2019 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 body of this report contains detailed tables showing these aggregate numbers at the index level, but you can get a sense of earnings expectations for these sectors by looking at Zacks Consensus estimates for bellwether operators in sectors like Finance and Consumer Discretionary.

Take for example, the case of JPMorgan (JPM), which is currently expected to earn $5.13 per share this year, down from $10.72 last year. For 2021, the current Zacks Consensus EPS estimate is $8.81 (vs. $10.72 in 2019). Disney (DIS) shares in the Consume Discretionary sector has held up pretty well during this downturn, with the market crediting the company for the launch of the streaming service. But it will take Disney till 2022 to get back to pre-Covid profitability levels.

But not every sector is expected to experience the earnings hit as companies in the above-referenced sectors are going through. The earnings declines for the Technology and Medical sectors in 2020 are very modest and these sectors recoup those declines very quickly. As a result, 2021 earnings for the Tech and Medical sectors are expected to be up +9.5% and +14.1% over the 2019 levels, respectively.

No doubt, stocks in these spaces have been standout performers in the market’s rebound from the March 23rd low.

You can clearly see the 2021 vs. 2019 comparison 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.

 

 

 

 

 

 

 

 

A lot will depend on the speed of the eventual recovery, which emerges as the current shelter-in-place policies starting easing.

In the best-case scenario, the bulk of the economic impact is confined to Q2, with growth trend stabilizing in Q3 and accelerating toward the end of the year. Driving this view is the expectation is that the outbreak has either peaked or close to peaking and starts subsiding thereafter. We will see if these expectations pan out.

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