Looking Ahead To A Coronavirus-Damaged Q2 Earnings Season

The COVID-19 pandemic put an abrupt stop to the impressive earnings growth cycle that got underway in 2010 and took corporate profitability into record territory. This earnings cycle got a huge boost from the tax reform legislation that gave us outsized gains in 2018. Earnings growth was essentially flat last year (2019), but for companies to sustain profitability levels at the record 2018 level in a maturing cycle with all the attendant margin pressures was no small achievement.

In the pre-COVID world, the expectation was for earnings growth to resume in 2020 and continue into next year. But then the pandemic arrived and those expectations adjusted, as the evolving earnings growth picture for 2020 shows below.

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The bulk of the earnings pain this year is expected to take place in the current period (2020 Q2) and estimates for the June quarter have taken a severe hit, as the chart below shows.

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Earnings growth is expected to remain negative in Q3 and Q4 as well, but the pace of declines is expected to decelerate, as the chart below of earnings and revenue growth expectations shows.

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This decelerating decline rate makes sense as the economy has started to reopen already, which should help the growth picture to some extent. Keep in mind that this earnings outlook mirrors the market’s outlook for the economy, which in turn reflects how the pandemic is expected to unfold going forward.

These growth estimates are the bottom-up consensus estimates aggregated to the S&P 500 index level.

All forecasts are uncertain, but these are even more uncertain given their dependence on a certain path forward for the pandemic. In any case, this what the market is pricing in at this stage.

Growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +26.4% relative to the still-declining 2020 estimates. The chart below shows the earnings growth picture on an annual basis.

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