With Q1 results from more than 85% of S&P 500 members already out, the bulk of the earnings season is now behind us. The reporting cycle starts winding down in the coming days, with this week bringing in results from almost 500 companies, including 20 from S&P 500 members. By the end of this week, we will have seen Q1 results from a little over 90% of the index’s total membership.

The results thus far have given us a good sense of the pandemic’s economic and earnings impact. The positive momentum we are seeing in the market is not because investors don’t think the data is bad, but rather because they are looking past that. The market is essentially looking ahead to the day when the pandemic will be in the rear view mirror.

One could argue that market participants are too optimistic about when we will be able to see the pandemic’s back or the availability of therapeutics. But that’s what markets do; they look ahead to the future and not dwell on the past. It is because of this forward-looking nature of the market that explains why stocks were up on Friday in the face of the unemployment rate reaching into depression-era levels.

Helping the market’s optimism is the unprecedented fiscal and monetary support that should provide a useful bridge to the other side of the downturn. Also, the downturn helped us appreciate the amazing role that technology is playing in our lives, helping entire businesses remain operational and functional despite being away from the work places.

We saw some of the same resilience in the technology sector’s results as well, which have held up a lot better relative to the environment we are in. And it is mostly technology stocks, coupled with medical stocks, that have been leading the market’s recovery from the March 23 lows.

These aren’t small parts of the market, but rather almost half of the S&P 500 index, in terms of market capitalization. The combined market capitalization of the Zacks Technology and Medical sectors, coupled with a few companies like Amazon (AMZN) that we have placed in the Retail sector and Netflix (NFLX) that is part of the Zacks Consumer Discretionary sector, equals 49.1% of the S&P 500 index’s total market capitalization. And the share of these areas is only increasing over time.

We should keep this in mind as we read market coverage in the media that suggests a disconnect between the stock market and developments in the broader economy; the so-called Main Street – Wall Street disconnect.

Q1 Earnings Season Scorecard

As of Friday, May 8, we have seen Q1 results from 434 S&P 500 members or 86.8% of the index’s total membership. Total earnings or aggregate net income for these 434 index members that have reported already are down -10.6% from the same period last year on +1.1% higher revenues, with 67.7% beating EPS and 58.3% beating revenue estimates.

The 20 S&P 500 members on deck to report results this week include Cisco (CSCO), Applied Materials (AMAT), Under Armour (UAA), Norwegian Cruise Lines (NCLH) and others.

As we mentioned last week, the Q1 results show the opposing effects that results from the two largest sectors in the S&P 500 index are having on the aggregate growth picture. These two largest sectors are Finance and Technology, with Finance dragging it down and Technology pushing it higher.

Had it not been for the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies at this stage would have been a lot better, thanks primarily to the Technology sector results.

• Excluding the Finance sector, whose Q1 earnings for the companies that have reported already are down -33.2% on +2.4% higher revenues, earnings for the rest of S&P 500 companies that have reported would be down only -2.8% (vs. down -10.6% with Finance).

• Excluding the Technology sector results, whose Q1 earnings are up +6.2% on +4.2% higher revenues, earnings for the rest of S&P 500 companies that have reported would be down -15.3% (vs. down -10.6% with Technology).

The comparison charts below put the results from these 434 index members in a historical context. The first set of two charts compare the earnings and revenue growth rates for these companies.

The second set compares the proportion of these companies beating EPS and revenue estimates.

The earnings growth comparisons start looking a lot better when seen on an ex-Finance basis, as the comparison chart below shows.

Earnings Estimates Are Still Falling

With most economic activity at a standstill and millions of Americans losing jobs, the economic growth backdrop in the current period (2020 Q2) is very bad. We are seeing this in earnings estimates, which have fallen sharply, though the pace of negative revisions has eased a bit in recent days.

To get a sense of this evolving earnings picture, take a look below at how earnings estimates for the June quarter have evolved over the last couple of months.

We are seeing something similar at play in estimates for full-year 2020 as well, as the chart below shows.

The chart below puts full-year 2020 earnings and revenue growth expectations in the context of where growth has been in recent years and what is expected beyond this year.

Please note that while these estimates represent a significant growth in earnings next year (+25.8%), the overall level of S&P 500 earnings in 2021 will be below the 2019 level, as the chart below shows.

Looking at the above aggregate earnings data on an ‘EPS’ basis, the 2021 ‘EPS’ for the S&P 500 index is currently expected to be $158.68, up from $126.10 in 2020, but modestly below the 2019 level of $162.14.