EC Making Sense Of The Earnings Picture

The Covid-19 pandemic dealt a severe blow to the U.S. economy and corporate profitability. The full extent of the pandemic’s earnings impact is becoming clearer as we enter the final stages of the Q2 earnings season. As would be expected during a downturn, earnings and revenue growth has suffered. But there are clear signs of improvement on the horizon as well, which should reassure market participants that had piled into stocks following the March 23rd lows, partly on expectations of such an improvement.

In the spirit of a picture-being-worth-a-thousand-words, we are using the charts below to tell story that emerges from the Q2 earnings season.

Please note that through Friday, August 7th, we have seen Q2 results from 445 S&P 500 members or 89% of the index’s total membership. We have another 12 index members on deck to report results this week, including Cisco (CSCO - Free Report), Applied Materials (AMAT - Free Report), Tapestry (TPR - Free Report), and others. 

The takeaway from the first chart is that analysts were totally in the dark as they set their Q2 EPS and revenue estimates. As we all know, most companies withdrew previously issued guidance given how difficult it was project business trends during the period because of the pandemic.

The chart shows the proportion of the 445 S&P 500 companies that have reported through Friday, August 7th, beating EPS and revenue estimates.

(Click on image to enlarge)

As you can see above, an above-average 56.4% of the S&P 500 members are beating both EPS and revenue estimates.

We knew that the pandemic dealt a severe blow to corporate profitability and the results of the 445 S&P 500 companies gives us a good idea of the magnitude of that growth hit. The second chart compares the year-over-year earnings and revenue growth for these 445 index members with what we had seen from the cohort of companies in other recent periods. Please note that when we say ‘earnings’, we mean aggregate net income, not mean or median EPS.

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William K. 1 month ago Member's comment

Thanks for the article. It shows WHAT has happened although a bit light on the mechanism of why. But that is OK because of all the unpredictable unknowns.

Carol D. Richards 1 month ago Member's comment

What do you think is the "why?"

William K. 1 month ago Member's comment

perhaps what is happening is that earnings are being made but they are not bigger and better than before. So i just might be, possibly, that a company can have quite good earnings without them being any greater than previous earnings.

These ARE uncertain times and it does happen that as plague cases areas and states my once again be "closed", I realize that the whole concept of existence without growth is totally foreign to many. but certainly it can happen. And in a system without inflation being fed by those with very vested interests, which has been the case since exiting the gold standard.