All Cap Analysis: Net Income Understates Core Earnings In 2020

The COVID-19 pandemic and ensuing economic damage dropped Core Earnings[1] for the NC 2000, our proxy for an All-Cap index, to the lowest level since September 2017. This report analyzes Core Earnings for the NC 2000 and each sector since 1998. It also complements our large-cap research on the S&P 500 and its sectors.

The NC 2000 consists of the largest 2000 U.S. companies by market cap in our coverage. Constituents are updated on a quarterly basis (March 31, June 30, September 30, and December 31). We exclude companies that report under IFRS and non-U.S. ADR companies.

Our measure of Core Earnings leverages cutting-edge technology to provide clients with a cleaner and more comprehensive view of earnings[2]. Investors armed with our measure of Core Earnings have a differentiated and more informed view of the fundamentals of companies and sectors.

Within the NC 2000, only the Technology, Consumer Non-cyclicals, and Healthcare sectors saw a rise in Core Earnings since the end of 2019, same for the S&P 500. The Core Earnings improvement in these sectors makes sense, as the shift to work-from-home, pantry loading, and a V-shaped recovery in healthcare spending drove a stronger rebound in these sectors than others.

Rankings the Sectors by Core Earnings Growth

Figure 1 ranks all 11 NC 2000 sectors by the change in Core Earnings from the end of 2019 through 11/17/20.

Figure 1: TTM Core Earnings Through 11/17/20 vs. Last year by NC 2000 Sector

Sources: New Constructs, LLC, and company filings. 
Our Core Earnings analysis is based on aggregated TTM data for the sector constituents.

The Technology sector generates the most Core Earnings by far (nearly 25% more than the next closest sector) and grew Core Earnings by 6% thus far in 2020. On the flip side, the Energy sector has the lowest Core Earnings and the largest drop since the end of 2019. Plummeting oil prices in early March followed by the COVID-19 shutdowns across the globe hit the energy sector hardest. 

Details on the NC 2000 & 11 Sectors

Figures 2-13 compare the Core Earnings and GAAP net income trends for the NC 2000 and every NC 2000 sector since December 1998.

NC 2000

Figure 2 shows the Core Earnings for the NC 2000 have fallen 19% since the end of 2019, which is less than the 36% drop in GAAP net income over the same time. Figure 2 also highlights the severe impacts brought on by the COVID-19 pandemic as Core Earnings for the NC 2000 sit at the lowest level since September 2017.

Figure 2: NC 2000 Core Earnings Vs. GAAP: 1998 – 11/17/20

Sources: New Constructs, LLC, and company filings. 
Our Core Earnings analysis is based on aggregated TTM data for the sector constituents in each measurement period.

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Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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