• The Positive and Reassuring Earnings Picture Continues

    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, 
    Here are the key points:
    Estimates for the current and coming quarters are steadily going up, as companies report better-than-expected Q4 results and guide higher. This is helping sustain the positive estimate revisions trend that has been in place since July 2020.
     For the 392 S&P 500 companies that have reported Q4 results already, total earnings are up +4.2% from the same period last year on +2.9% higher revenues, with 79.8% beating EPS estimates and 77.8% beating revenue estimates. This is a notably better performance than we have seen from the same group of companies in the first three quarters of the year.
     For the Tech sector, we now have Q4 results from 88.0% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Tech companies are up +21.4% on +14.8% higher revenues, with 87.9% beating EPS estimates and 84.5% beating revenue estimates.
     The Tech sector’s Q4 earnings performance represents a notable improvement over what we have been seeing in other recent periods.
     Looking at Q4 as a whole, total earnings for the S&P 500 index are expected to be up +2.8% on +2.8% higher revenues, which would follow back-to-back quarterly declines in the first three quarters of the year.
     Overall, 7 of the 16 Zacks sectors are expected to experience earnings declines in Q4, with Transportation (-91.5% decline), Energy (-95.1%), Consumer Discretionary (-62.0%) and Aerospace (-137.4%) as the big decliners.
     For the Finance sector, Q4 earnings are now expected to be up +15.6% from the same period last year on +1.3% higher revenues, which would follow declines of -11.7% in 2020 Q3, – 45.3% in Q2, and -32.4% in Q1.
     For the Technology sector, Q4 earnings are expected to be up +20.0% on +14.5% higher revenues, which would follow +12.9% earnings growth in Q3.
     Other sectors with positive earnings growth in Q4 include Construction (+30.7% earnings growth), Autos (+168.6%), Medical (+14.6%), Basic Materials (22.8%), and Retail (+11.1%).
     Looking at the calendar-year picture for the S&P 500 index, earnings are on track to decline -16.5% on -0.8% lower revenues in 2020 and increase +27.6% on +8.8% higher revenues in 2021. For 2022, index earnings are expected to be up +15.6% on +6.8% higher revenues.
     The implied ‘EPS’ for the S&P 500 index, calculated using current 2020 P/E of 30.1X and index close, as of February 16th, is $130.70, down from $156.60 in 2019. Using the same methodology, the index ‘EPS’ works out to $166.82 for 2021 (P/E of 23.6X) and $192.78 for 2022. The multiples have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
     For the small-cap S&P 600 index, we now have Q4 results for 279 index members or 47.1% of the index’s total membership. Total earnings for these companies are up +3.2% from the same period last year on -1.6% lower revenues, with 73.8% beating EPS estimates and 78.9% beating revenue estimates.
     Looking at Q4 as a whole for the small-cap index, total earnings are projected to fall -8.8% on -1.1% lower revenues. This would follow the -5.8% decline on -4.9% lower revenues in Q3.
     For full-year 2020, the S&P 600 index is expected to experience a -29.7% decline in earnings on -9.6% lower revenues, with easy comps pushing earnings growth to +45.6% in 2021. 
    The market’s rebound from the post-Covid lows was initially heavily concentrated in the Tech sector, particularly the handful of big technology operators. The rally has since expanded to other spaces beyond the Tech sector. But the leadership position of the major Tech players was put in the spotlight recently as a result of their impressive Q4 results.
    The top 5 technology players – Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT) and Facebook (FB) – collectively now account for 22.4% of the S&P 500 index’s market capitalization, significantly above the Finance sector’s current 13% weightage.
    These big technology players are enormously profitable. Take for example, Alphabet and Amazon that reported recently. Amazon’s Q4 earnings more than doubled to $7.2 billion on +43.6% jump in revenues to $125.5 billion. Alphabet’s Q4 earnings increased +42.7% on +23.6% higher revenues. For this group of 5 big technology players, Q4 earnings increased +41.2% on +29% stronger revenues, with these 5 companies bringing in 21.4% of all S&P 500 earnings for the quarter.
    Beyond these top 5 companies, total Q4 earnings for the 88.0% of the Tech sector’s total market capitalization in the S&P 500 index that have reported results are up +21.4% from the same period last year on +14.8% higher revenues, with 87.9% beating EPS estimates and 84.5% beating revenue estimates. This is a notably stronger showing relative to what we have been seeing from the sector in other recent periods, as the two sets of comparison charts below show.
    The group’s Q4 results represent a continuation of what it reported in the first three quarters of the year, when it hardly lost a beat in the face of the pandemic. For 2020 as a whole when earnings for the broader S&P 500 index are on track to decline -16.5%, earnings for these 5 Tech leaders increased +21.7% on +19.2% revenue gains, as the table below shows.

    Favorable Revision Trend
    As we have consistently been pointing out since the start of this reporting cycle, the tone and substance of management guidance remains positive and reassuring. This is helping estimates for the current period (2021 Q1) climb, as the chart below shows.

    Estimates for full-year 2021 have gone up as well, but we see a significant acceleration in the favorable revisions trend in the coming months on the back of a stronger-than-expected rebound in consumer and business spending as the ongoing vaccination effort gains pace. We strongly feel that current consensus estimates for 2021 GDP and earnings growth understate the full extent of the rebound.
    The chart below shows the quarterly earnings and revenue growth picture. Please note that the +2.8% earnings growth on +2.8% growth in revenues for 2020 Q4 is the combined or blended growth rate.

    We remain positive in our earnings outlook, as we see the full-year 2021 growth picture steadily improving through the first half of the year as more of the population gets vaccinated.
    We strongly feel that current consensus economic growth projections reflect learned experiences of economic recoveries from the last few recessions. We don’t think that this recovery will follow this past pattern as this downturn was fundamentally different, as its epicenter was medical and not financial. As such, we see significant upside to current consensus GDP growth estimates for 2021, which drives our favorable earnings outlook for the year and beyond.
    The chart below shows the overall earnings picture on an annual basis.

    The flow of recent economic readings about the labor market, factory space and even retail sales suggest that activity levels have moderated in response to the ongoing surge in infections. But with the extraordinary vaccination effort already underway, it is reasonable to expect the pandemic getting under control towards the end of the first quarter of 2021.
    As such, while growth in the current period (2020 Q4) will likely remain under pressure, we should expect the outlook to steadily improve. Beyond the Q4 earnings season, the outlook remains positive.
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