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Making Sense of the Pandemic Earnings Picture

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 picture emerging from the Q1 earnings season is showing a significant drop in corporate profitability as a result of the pandemic, with S&P 500 earnings for the June quarter and full-year 2020 now expected to be down -39.7% and -21.8%, respectively.
  • While the brunt of the earnings hit is expected to be in the current period (2020 Q2), earnings growth is expected to remain negative in the second half of the year as well, with positive growth expected to resume next year.
  • Given the unsettled macroeconomic outlook, a function of the public health issue, it is reasonable to be skeptical of current estimates. That said, aggregate full-year 2021 earnings estimates are now modestly below the 2019 level, even though they represent a big jump over the still-declining 2020 level.
  • For the 353 S&P 500 members that have reported Q1 results, total earnings or aggregate net income is down -13.0% on +0.5% higher revenues, with 67.1% beating EPS estimates and 60.1% 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.
  • 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 +6.1% and +4.5% 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, we now have Q1 results from 89.9% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Finance companies are down -36.1% from the same period last year on +2.3% higher revenues, with only 52.7% of the sector companies beating EPS estimates and 63.5% 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 -4.8% (vs. -13.0% including the reported Finance results).
  • For the Consumer Staples companies (90.2% of the sector’s market cap in the S&P 500 companies has reported), total Q1 earnings are up +4.6% on +2.4% higher revenues, with 79.2% beating EPS estimates and 58.3% beating revenue estimates.
  • For Q1 as a whole, total S&P 500 earnings or aggregate net income is now expected to decline -12.8% from the same period last year on +1.3% higher revenues. Excluding the Finance sector drag, Q1 earnings for the rest of the index would be down -7.2%.
  • Q1 earnings are expected to be below the year-earlier level for 10 of the 16 Zacks sectors, with double-digit declines at Autos (-76.7% earnings decline), Aerospace (-39.9%), Energy (-25.9%), Basic Materials (-32.6%), Transportation (-61.6%), Industrial Products (-18.8%), Conglomerates (-17.0%), Consumer Discretionary (-26.9%), Finance (-31.4%),  and Retail (-20.1%).
  • Sectors with positive earnings growth in Q1 include Construction (+24.5%), Business Services (+7.8%), Medical (+9.0%), Consumer Staples (+5.3%), and Utilities (+5.7%) and Technology (+3.0%).
  • Estimates for Q2 and Q3 are still falling, with Q2 earnings now expected to decline -39.7% and Q3 expected to suffer a -22.4% decline. Sectors suffering the brunt of estimate cuts in Q2 include Energy (-140.7% decline in earnings), Autos (-208.8%), Transportation (-152.6%), Aerospace (-51.2%). Other sectors with big year-over-year earnings declines include: Consumer Discretionary (-72.4%), Basic Materials (-50.8%), Industrial Products (-50.5%), and Conglomerates (-63.0%).
  • For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -21.8% on -6.6% 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 22.6X and index close, as of May 5th, is $126.86, down from $162.18 in 2019. Using the same methodology, the index ‘EPS’ works out to $159.41 for 2021 (P/E of 18.0X), modestly below the 2019 level ($162.18). 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 +25.7% 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 -46.7% from the same period last year on -4.6% lower revenues. This would follow +0.6% earnings growth in the preceding period. The Q1 earnings growth picture would be even weaker had it not been for the strong growth in the Finance sector.


We are in uncharted territory with respect to the economic and corporate earnings impact of the ongoing lockdown environment that has started to ease to some extent. The level of uncertainty about the extent and duration of the underlying public health issue makes quantifying the impact very difficult, if not altogether impossible.

Some industries have literally been in the eye of the storm and results from companies in those spaces like Ford (F), Delta Air (DAL), Southwest (LUV), Starbucks (SBUX), Boeing (BA) and others, amply prove this point. Many others that aren’t directly affected like Alphabet (GOOGL), Advanced Micro Devices (AMD) and others are not shielded either.

While the lockdown conditions in the U.S. arrived only in the final weeks of the quarter, they spanned most of the quarter in China and other regions. We saw that in the results from truly global players like Coca-Cola (KO) and Proctor & Gamble (PG), with the former suffering and later benefiting from the pandemic.

With the bulk of the pandemic’s economic impact expected to take place in the current period (2020 Q2), analysts have been sharply lowering their estimates over the last few weeks, as the chart below shows.









With Q2 expected to be the ground zero for the lockdown’s economic impact, three of the 16 Zacks sectors are expected to lose money in the quarter. These are Energy, Autos and Transportation, whose Q2 earnings for these sectors expected to be down -140.7%, -208.8% and -152.6% from the year-earlier level, respectively.

Other sectors with year-over-year earnings declines include Consumer Discretionary (-72.4%), Basic Materials (-50.8%), Industrial Products (-50.5%), Conglomerates (-63.0%) Aerospace (-51.2%) and Finance (-34.6%). 

The chart on the next page presents expectations for Q1 and Q2 in the context of what was actually reported in the preceding periods and what is currently expected in the back half of the year.









The chart below shows the growth picture on an annual basis. As you can see, estimates for this year are going down in a major way.









Estimates for full-year 2020 have come down sharply and the trend will likely continue as we move through Q2 and beyond. The big issue now is what happens to next year’s estimates, currently expected to be up +25.7% from the still-declining 2020 level.

The chart below shows the absolute dollar value of annual estimates.









But as you can see above, the estimated 2021 earnings level for the S&P 500 index is now modestly below the 2019 and 2018 levels, even though it represents a big jump over wherever the 2020 level settles.

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 peaks in the late-April/early-May timeframe and starts subsiding thereafter. We will see if these expectations pan out, but the coming earnings season will be unusual in many ways.

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