The Covid-19 pandemic put an abrupt stop to the impressive earnings growth cycle that got underway in 2010 and took corporate profitability into record territory. This earnings cycle got a huge boost from the tax reform legislation that gave us outsized gains in 2018. Earnings growth was essentially flat last year (2019), but for companies to sustain profitability levels at the record 2018 level in a maturing cycle with all the attendant margin pressures was no small achievement.
In the pre-Covid world, the expectation was for earnings growth to resume in 2020 and continue into next year. But then the pandemic arrived and those expectations adjusted, as the evolving earnings growth picture for 2020 shows below.
The bulk of the earnings pain this year is expected to take place in the current period (2020 Q2) and estimates for the June quarter have taken a severe hit, as the chart below shows.
Earnings growth is expected to remain negative in Q3 and Q4 as well, but the pace of declines is expected to decelerate, as the chart below of earnings and revenue growth expectations shows.
This decelerating decline rate makes sense as the economy has started to reopen already, which should help the growth picture to some extent. Keep in mind that this earnings outlook mirrors the market’s outlook for the economy, which in turn reflects how the pandemic is expected to unfold going forward.
These growth estimates are the bottom up consensus estimates aggregated to the S&P 500 index level.
All forecasts are uncertain, but these are even more uncertain given their dependence on a certain path forward for the pandemic. In any case, this what the market is pricing in at this stage.
Growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.4% relative to the still-declining 2020 estimates. The chart below shows the earnings growth picture on an annual basis.
As strong as next year’s growth estimate is, total index earnings would still haven’t gotten back to pre-Covid levels. In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the chart below shows.
These numbers translate to an index ‘EPS’ of $156.12 in 2021 vs. $123.47 in 2020 and $161.26 in 2019.
Q1 Earnings Season Scorecard
As of Friday, May 22, we have seen Q1 results from 479 S&P 500 members or 95.8% of the index’s total membership. Total earnings or aggregate net income for these 479 index members are down -12.7% from the same period last year on +1.3% higher revenues, with 66.4% beating EPS and 58% beating revenue estimates.
We have another 13 S&P 500 members on deck to report results this week. This week’s docket includes results from Costco (COST), AutoZone (AZO), Salesforce (CRM), Dollar General (DG) and others. Please note that the Costco and AutoZone reports will be for those companies’ fiscal quarters ending in May, which we count as part of our June-quarter tally.
In other words, the Q2 earnings cycle will get underway this week even though we haven’t closed the books on the Q1 reporting season yet.
As we have been pointing out all along, Q1 results show the opposing effects that the two largest sectors in the S&P 500 index are having on the aggregate growth picture. These two largest sectors are Finance and Technology, with Finance dragging it down and Technology pushing it higher.
Had it not been for the Finance sector drag, Q1 earnings growth would have been a lot better, thanks primarily to the Technology sector results.
- Excluding the Finance sector, whose Q1 earnings are down -33.1% on +2.4% higher revenues, earnings for the rest of S&P 500 companies would be down only -6.4% (vs. down -12.7% with Finance).
- Excluding the Technology sector results, whose Q1 earnings are up +5.1% on +4.6% higher revenues, earnings for the rest of S&P 500 companies would be down -17.7% (vs. down -12.7% with Technology).
The comparison charts below put the results from these 479 index members in a historical context. The first set of two charts compare the earnings and revenue growth rates for these companies.
The second set compares the proportion of these companies beating EPS and revenue estimates.
The earnings growth comparisons start looking a lot better when seen on an ex-Finance basis, as the comparison chart below shows.
For an in-depth look at the overall earnings picture and expectations for the coming quarters, please check out our weekly Earnings Trends report >>>> Covid-19 Impact on Earnings to Linger Through 2021
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