You may not have noticed, but Q3 earnings season went remarkably well.
In fact, it was “stellar,” to quote Goldman’s David Kostin. More than two-thirds of S&P 500 companies beat consensus by one standard deviation or more. That was the best showing in at least 22 years. Only 6% of companies missed. That was the lowest share ever.
Headed in, consensus expected a 21% YoY decline. Instead, the drop was just 8%.
A similar dynamic played out in Q2, although the severity of the situation made it impossible to avert a collapse. Still, earnings for the second quarter fell far less than consensus expected at the end of June.
If you’re wondering what to thank, you could cynically suggest the bar was set so low that a legless mouse could have cleared it, or you could point to margins. Revenue fell, as expected, but companies managed to limit margin contraction to just 83bps. The street expected a 220bps decline.
The disparity between, on the one hand, healthcare and tech, and everything else on the other, remained rather wide. Those two sectors, along with staples, delivered solid EPS and sales growth, while other sectors either stood still or, in the case of energy and industrials, posted large declines.
As you might imagine, these results embolden Goldman in their relatively sanguine view on profits in 2021. As a reminder, the bank expects S&P earnings for next year to be $175, around 6% higher than 2019’s pre-pandemic $165.
These expectations are predicated on assumptions about a vaccine which, in turn, inform Goldman’s above-consensus expectations for growth. The US economy, the bank reckons, will expand by 5.3% in 2021. Consensus is at just 3.8%.
As Kostin reminds clients, Goldman’s economic forecast “assumes at least one vaccine is approved by January and widely distributed across the US in H1 2021.”
If you’re wondering what impact new lockdowns would have on the bank’s earnings forecasts, Kostin says not much, really. Goldman’s Effective Lockdown Index registered 50 in April and sits at 20 now. If the country were to average 30 on the restrictions gauge from next month through February (for example), that would trim $2 from the bank’s Q4 EPS estimate and $5 from Q1 2021 earnings.
“This may overstate the downside risk given easier year/year comps and the likelihood of a smaller virus drag on manufacturing than occurred in the spring,” Kostin remarked, in a Friday note. “Our estimates would still remain above consensus.”
As ever, there’s a caveat. And it’s one I happen to wholeheartedly agree with. Goldman reiterates that disposable income “actually rose by 10%” during the second quarter of 2020 despite the depression-like collapse in GDP. That was, of course, thanks to fiscal stimulus and transfer payments.
The bank sees a new package of measures totaling roughly $1 trillion getting passed in 2021. The delay, Kostin says, “poses a potential downside risk to Q4 2020 EPS, and potentially also longer-term risks if fiscal aid is too small or too late to avoid major economic scarring.”