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 revisions trend continues to improve, though the pace of improvement has moderated in recent days as the Q2 reporting cycle has moved towards conclusion. This improvement in earnings estimates remains a notable shift in the post-pandemic earnings picture.

 

• Total earnings for the 484 S&P 500 members that have reported Q2 results already are down -32.3% on -9.5% lower revenues, with 80.4% beating EPS estimates and 64.0% beating revenue estimates.

 

• This is the lowest earnings growth pace since the last earnings downturn following the 2008 recession, but the proportion of these companies beating consensus estimates, particularly EPS estimates, is tracking above historical trends.

 

• For 2020 Q3, total S&P 500 earnings are expected to decline -23.9% on -3.2% lower revenues. This is an improvement from the -26.5% earnings decline expected at the start of July.

 

• For full-year 2020, total earnings for the S&P 500 index are currently expected to be down -21.0% on -4.9% lower revenues. As with Q3 estimates, full-year estimates have been going up since early July. 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.

 

• Growth is expected to resume next year, thanks to easy comparisons, but the dollar level of earnings in 2021 will still be below the 2019 level.

 

• The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 27.2X and index close, as of August 25th, is $126.75, down from $160.41 in 2019. Using the same methodology, the index ‘EPS’ works out to $158.62 for 2021 (P/E of 21.7X). 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 +25.1% from the 2020 level, the absolute dollar amount of 2021 earnings estimates remain below the 2019 level.

 

• For the small-cap S&P 600 index, we have Q2 earnings from 559 index members. Total earnings for these small-cap companies are down -56.5% from the same period last year on -16.7% lower revenues, with 70.8% beating EPS estimates and 65.5% beating revenue estimates.

 

• The proportion of S&P 600 members beating Q2 EPS and revenue estimates is significantly above historical levels, suggesting that estimates for the small-cap companies were even lower than their large-cap peers.

 

The Market Haves & Have-Nots

A big part of market discourse lately has been centered around a lack of breadth, with a handful of companies accounting for an ever-growing share of the market-cap weighted S&P 500 index.

Specifically, the top 5 Tech companies in the index – Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Facebook (FB) – have been impressive stock market performers this year, with the group up +49% on average vs. the +4% gain for the index as a whole. The market gains for these 5 range from an +81% gain for Amazon to a ‘mere’ +19.9% for Alphabet in the year-to-date period, with the other three falling somewhere in the middle of that range.

As a result, these 5 Tech majors now collectively account for 24.2% of the S&P 500 index’s total market capitalization, double the proportion of the Finance sector in the index. This means that about a quarter of this market-cap weighted index, which typically serves as a proxy for the stock market as a whole, is now comprised of these 5 companies.

While the index as a whole is at an all-time record level currently, thanks to these high flyers, a big proportion of its membership is still in negative territory for the year. To be specific, 275 S&P 500 members are down this year, as of August 26th. ExxonMobil (XOM), which just exited the Down Jones Industrial Average is down -41% this year, replaced by Salesforce.com (CRM), which is up +33%.

The issue of index concentration is a bigger discussion, and our focus in this earnings-centric publication remains on the broader earnings outlook. To that end, this group of 5 Tech companies is on track to bring in 15.2% of the S&P 500 index’s total earnings in 2020, up from 11.2% of the total in 2019.

The Covid-19 pandemic has been a big blow to corporate profitability this year, with aggregate earnings for the S&P 500 index currently expected to be down -21% in 2020. But these 5 Tech companies (and many others in the Tech space) are enormously profitable, both during the pandemic as well as on the other side.

The chart below shows the combined earnings and revenue growth outlook for these 5 Tech leaders.

 

 

 

 

 

 

 

 

 

 

 

The market appears to be rewarding the earnings growth certainty of these Tech leaders in a backdrop of historically low interest rates. We are sympathetic to that view, but remain cognizant of the fact that some of these multiples are way too rich for our taste.

Improving Earnings Outlook

As we have been consistently pointing out over the last two months, the revisions trend continues to remain positive, as the chart below shows.

 

 

 

 

 

 

 

 

 

 

 

 

 

We are seeing a similar improvement in estimates for 2020 Q4 and full-year 2021 as well. The chart below shows the quarterly earnings and revenue growth picture.

 

 

 

 

 

 

 

 

 

 

 

 

The chart below shows the overall earnings picture on an annual basis.

 

 

 

 

 

 

 

 

 

 

 

 

The recent flow of economic readings has been broadly positive, suggesting that the hoped-for recovery is firmly in place. This is showing up in earnings estimates as well, which have started improving in a meaningful way, as indicated earlier. The question at this stage is whether the improving trend can continue even as the underlying health issue remains unresolved.

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