Earnings season is upon us, but it’s not clear how much the numbers matter.
Last summer, many market participants were keen on the idea that the best approach was to simply “look through” 2020 — to effectively write it off as an anomaly.
While that’s one way to explain how equity benchmarks managed to summit new peaks during the worst economic downturn in a century, it wouldn’t be accurate to say investors ignored the pandemic. After all, the biggest winners were tech and other manifestations of the stay-at-home trade.
And yet, there was most assuredly a sense in which markets, comforted by a Fed that was prepared to buy corporate bonds if it meant averting a credit crunch, and pacified by unprecedented policy coordination that kept financial conditions loose and replaced income lost to the lockdowns, simply “moved on,” so to speak.
Eventually, the vaccines were approved, and that sparked a rotation, the durability of which is the subject of much debate.
While the economy staged a mechanical rebound in the third quarter, things were bad. Things still are bad. And while corporate profits proved perhaps more resilient than many thought possible, they nevertheless plunged.
Just to recap, S&P 500 EPS dropped 15% in Q1 2020, 32% in Q2, and 8% in Q3. The latter two figures were markedly better than consensus expected at various intervals following the onset of the pandemic, but the green-shaded area shows you just how far awry the best-laid plans can go.
At the end of Q3, consensus expected Q4 earnings to drop 14% YoY. Fast forward to earnings season and that forecast is now -11%.
For their part, Goldman thinks upside surprises are possible, although clearly, dispersion will be the name of the game. For example, healthcare is seen posting 2% earnings growth, while tech should likewise eke out higher profits. Energy, by contrast, will probably see earnings collapse by 102% and industrials by 40%, analysts reckon.
Goldman’s David Kostin said that overall, “risks to Q4 EPS estimates appear tilted to the upside.” “Since 2003, realized S&P 500 EPS has averaged 4% greater than consensus expectations at the start of reporting season,” he wrote in his most recent note, adding that in Q2 and Q3, by contrast, “the aggregate S&P 500 surpassed consensus expectations by 24% and 17%, respectively.”
Obviously, some of that was down to the extreme difficulty in forecasting profits at a time when it was unclear whether many businesses would be able to function at all. Indeed, Goldman’s own forecasts admitted of large on-the-fly revisions, just like everyone else’s around that time.
Still, Kostin reminded investors that margin deterioration was less acute than expected in the previous two quarters. Of course, he also cautioned that stimulus dithering during the period could have constrained consumption. Indeed, we now know that retail sales fell each month during Q4, while personal spending decelerated as well.
Coming back to where we began, Kostin said that “consistent with the previous two quarters, we expect investors will look through Q4 results and focus on company commentary about the trajectory of recovery in 2021.”
Guidance was difficult to come by in 2020 and while one would assume the C-suite will be more comfortable making projections now that vaccines are getting into people’s arms, it’s still quite difficult to project how long it will take for some industries to recover. Indeed, some sectors may not recover — ever. And many fear we’ve not seen the last of the bankruptcies.
For what it’s worth, Goldman has again raised their projection for stimulus following the announcement of Biden’s “American Rescue Plan.” The bank now expects $1.1 trillion in additional stimulus from Congress.
It looks as though Kostin’s projections for aggregate S&P EPS are unchanged following Biden’s announcement. You might recall that Goldman’s forecasts were revised earlier this month once the “blue wave” was realized following the Georgia runoffs. The figure (below) is a summary.
The bank did update its sector forecasts. Kostin expects eight of the 11 sectors to post earnings above pre-pandemic levels by the end of this year. “As vaccine rollout develops, we expect sectors with the highest degree of operating leverage–namely, Consumer Discretionary and Energy–will deliver some of the fastest EPS growth,” he said.
But that doesn’t mean energy is out of the woods. There are three sectors where Goldman expects EPS to remain below 2019 levels this year: Energy, industrials and financials. The pro-cyclical rotation notwithstanding, Kostin noted that “Info Tech will continue to deliver rapid growth and represent the largest share of S&P 500 EPS given its exposure to long-term secular trends.”
What was it I said on Saturday? Oh, that’s right, this: “The structural deflationary forces in place prior to the pandemic have not gone away. And it’s not exactly as if technology will somehow become less important going forward. In the same vein, one can’t help but think that all antitrust probes aside, tech companies will continue to attract flows and investor interest, while “old” energy, banks, and cyclicals struggle to adapt to a world that arguably left them behind years ago.”
