The Nike (NKE - Free Report) earnings release on Thursday exemplifies the challenge and uncertainty facing the market as we look ahead to the June-quarter earnings season that will take the spotlight from mid-July onwards. Nike’s huge miss reflected analysts’ difficulty in coming up with reasonable estimates in a backdrop of pandemic-driven lockdowns in many parts of the world.

This lack of visibility reflected itself in the wide dispersion of estimates for Nike and we are seeing something similar in place for FedEx (FDX - Free Report), ConAgra (CAG - Free Report) and Constellation Brands (STZ - Free Report) that are on deck to report results this week. Micron (MU - Free Report) and General Mills (GIS - Free Report), also reporting results this week, have a relatively narrower range of estimates, suggesting a high degree of confidence among the analysts covering these companies’ operations.

The recent upsurge in infection rates across the country’s South and Southwest throws a wrench in the economy’s reopening momentum that had been well underway for the last few weeks. This has implications for the economic recovery that had started showing up in data, with numbers for May showing a significant improvement over the prior month and so on. A reversal or even stalling of this process is a notable setback for the market and we are starting to see that in increased day-to-day volatility.

Earnings estimates had started stabilizing in recent weeks, after falling sharply in March and April as the pandemic took hold. Full-year 2020 earnings estimates dropped from a roughly +8% growth in early January to a decline of -24.2% today. Estimates haven’t dropped much since mid-May, but they will likely start going down further in the coming days, particularly as companies report Q2 results and discuss what they see on the ground in their respective spaces.

We had started hoping in recent weeks that the coming reporting season will offer more clarity in the earnings picture relative to what management teams could tell us back in April. But the recent surge in infections likely means that management teams will likely still be unable to provide much useful guidance.

The current state of consensus earnings expectations is captured in the following 5 charts. 

The first chart shows how S&P 500 earnings estimates for full-year 2020 have evolved since early January. As you can see below, the expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -24.2% decline, down from -24.1% last week.

The second chart shows how S&P 500 estimates have evolved for the current period (2020 Q2), which is expected to be the downturn’s bottom.

The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next four quarters contrasted with actuals for the preceding four periods; expectations for 2020 Q2 have been highlighted.

The fourth chart provides a big-picture view on an annual basis.

As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.9% relative to 2020 estimates. But as strong as next year’s growth estimate is, a total of 2021 index earnings would still haven’t gotten back to pre-COVID levels.

In other words, S&P 500 earnings in 20201 are currently expected to be modestly below the 2019 level, as the fifth chart below shows.

These numbers translate to an index ‘EPS’ of $155.12 in 2021 vs. $122.20 in 2020 and $161.21 in 2019.

Q2 Earnings Season Gets Underway

The Q2 reporting cycle will (unofficially) get underway with the JPMorgan (JPM - Free Report) report on July 14th. But from our perspective, the Q2 earnings season has gotten underway already, with results from 12 S&P 500 out at this stage. These 12 index members - including Nike, Oracle (ORCL - Free Report), Adobe (ADBE - Free Report), and others - reported results for their fiscal quarters ending in May, which we count as part of official June-quarter tally.

We will have an additional 5 index members report such May-quarter results this week, including FedEx, Constellation Brands (STZ - Free Report), and others. By the time we JPMorgan reports its Q2 results on July 14th, we will have seen such results from almost two dozen S&P 500 members.

For the 12 index members that have reported already, total Q2 earnings or aggregate net income is down -53.4% on -10% lower revenues, with 66.7% (8 out of the 12) beating EPS estimates and only 33.3% (4 out of 12) beating revenue estimates.