Earnings Rebound Picking up Speed

Posted on November 12, 2020 by Rick Fisher Jr.

Third quarter earnings season has been outstanding relative to expectations by many measures. Some of the highlights:

  • S&P 500 Index earnings are tracking to a 7.5% year-over-year decline, as shown in the LPL Chart of the Day, more than 14 percentage points above expectations when earnings season began.

View enlarged chart.

  • If the earnings beat rate of 86% holds with 10% of companies yet to report, it would mark the highest percentage of companies to exceed consensus earnings estimates since FactSet began tracking this statistic in 2008.
  • On average, S&P 500 companies have beaten consensus earnings estimates by more than 18%, below last quarter’s 22% clip when analysts were pretty much guessing, but one of the best numbers recorded in recent decades.
  • While S&P 500 earnings fell compared with prior-year levels, earnings for the Russell 1000 Growth Index actually rose 14% year over year during the quarter.
  • Earnings estimates for the fourth quarter rose 1.8% during October, the best increase during the first month of a quarter since the first quarter of 2018, which was artificially boosted by corporate tax cuts via the Tax Cut and Jobs Act of 2017. Historically estimates tend to drop during earnings season.

“We believe the huge upside surprise in earnings may get more attention as more political uncertainty clears,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “S&P 500 companies have a shot at returning to pre-pandemic levels of corporate profits in 2021, which we didn’t think was possible just a couple of months ago. We have to re-evaluate how much earnings power corporate America will have post-pandemic.”

Looking forward, it’s fair to say that—after seeing such strong third quarter results and record progress on vaccine development—we expect corporate America in aggregate to reach pre-pandemic levels of profitability sooner than we had anticipated just a month ago. The cost efficiencies companies have gained during the pandemic will bear fruit once the pandemic is over, and we think analysts will be surprised by how profitable S&P 500 companies will be once the economy is fully reopened.

At the same time, recent COVID-19 spread and renewed restrictions that may follow could slow the pace of the economic recovery and remain a risk to the earnings rebound while we wait for a vaccine(s) to be distributed in the months ahead. We also must watch the political landscape and tax and regulatory changes that may come along.

Look for more on the strong third quarter earnings season in our next Weekly Market Commentary due out Monday.

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