The bar was extremely low.
The most challenging earnings season in living memory is now (basically) on the books, and results did manage to come in ahead of expectations, although that’s not saying much.
In a note dated Friday afternoon, Goldman writes that with 88% of the S&P 500 market cap having reported, 58% of firms posted a one standard deviation EPS beat. That, the bank’s David Kostin notes, “is well above the long-term average of 47% and nearly matches the previous record high from 2009 post-Financial Crisis”.
Ultimately, S&P 500 earnings fell 34% YoY in the second quarter, far less than some of the most pessimistic estimates from a few months back, and much better than than the 45% drop consensus expected as companies began to report.
Of course, the hurdle wasn’t all that difficult to clear, something Kostin readily admits.
“Consensus bottom-up earnings estimates had been drastically cut ahead of Q2 earnings season”, he writes. “As a result of low expectations, companies that beat EPS estimates have only outperformed the market by 36 bp on average during the day following reports, below the historical average of 110 bp”.
When the bar is that low, you don’t win plaudits for clearing it, apparently.
The visual (above) shows that Goldman has revised its outlook for Q3 and Q4 results higher in light of the better-than-expected Q2 numbers. The bank is now more optimistic than consensus. The 20% decline seen in Q3 compares to the 30% drop Goldman saw previously.
Obviously, mega-cap tech distorts the picture or, as Kostin puts it, “the composition of the S&P 500 helps explain why Q2 results were stronger than what we expected based on the state of the economy”.
If one were to extrapolate from the historical relationship between the economy and corporate earnings, Q2’s 10% YoY GDP contraction would have translated to a ~60% drop in profits which, incidentally, was Goldman’s estimate at one point.
“The strength of technology broadly and specifically the market-leading FAAMG stocks has also helped S&P 500 earnings fare better than what the economic environment would normally indicate”, Kostin continues, adding that,
Excluding Info Tech, S&P 500 EPS fell by 41% in 2Q. The five largest stocks in the S&P 500 (FB, AMZN, AAPL, MSFT, and GOOGL, or “FAAMG”) account for 16% of S&P 500 EPS, and each of those companies beat consensus sales and EPS estimates by more than one standard deviation in the quarter. In aggregate, FAAMG EPS grew by 2% year/year in 2Q compared with an aggregate decline of -38% for the other 495 S&P 500 companies.
That’s corporate “inequality” for you.
Kostin goes on to reiterate why it is that the FAAMG cohort managed to hold up so well despite the most challenging economic environment in a century:
The FAAMG stocks benefit from secular trends expedited by the coronavirus, such as cloud spending and e-commerce, and continue to capture an increasing share of their respective markets.
Right. Or, as I put it previously, these monopolies permeate nearly every facet of daily life. And for millions upon millions of Americans, digital life was the only kind of existence possible during the pandemic.
Mega-cap tech are the new utilities. It’s simple really. You seek safety in the oligopoly whose businesses pervade nearly every aspect of human existence. The pandemic reinforced the trend towards a digitized, virtual world.
For the year, Goldman is raising its S&P 500 EPS estimate to $130 from $115. $11 of that is down to the better-than-expected Q2 results.
Read more: All Hail