S&P 500 20Q4 Earnings Preview: Off To A Flying Start

The peak-period of earnings season will begin over the next few weeks, where approximately 80% of constituents report.  The current S&P 500 20Q4 earnings and revenue growth rate are -7.8% and -1.2% respectively.

In a typical quarter, year-over-year (YoY) growth expectations decline by an average of 3.6 percentage points (ppts) from the start of the quarter to the start of earnings season.  However, 20Q4 YoY earnings have increased by 1.5 ppts over this period to -10.3% by Jan. 1, 2021. Consumer Discretionary saw the greatest improvement over this period, with YoY earnings increasing 3.0 ppts to -22.6% by Jan. 1. Conversely, the energy sector saw expectations decline by 2.8 ppts to -98.3%.

Seeing an increase in growth expectations heading into earnings season is a rarity.  As shown in Exhibit 1, the growth rate does not typically improve heading into earnings season and has only done so six times over the last decade.  The last time this occurred was in the most recent earnings season (20Q3), where earnings increased by 1.7 ppts.  We also saw this momentum carry out through the quarter, as the 20Q3 growth rate improved from -21.4% at the start of earnings season to -6.5% at the end of earnings season.  This resulted in a 14.9 percentage point gain during the quarter, which is the third largest improvement on record (dating back to 2002 Q3).

We are observing a similar trend in 20Q4, as the earnings growth rate has already improved from -10.3% to -7.8% in the beginning two weeks of earnings season.

Exhibit 1: S&P 500 Growth Rate Change Heading into Earnings Season

How high can we go?

This raises the question if we see a similar improvement to earnings growth in 20Q4.  Of the 26 constituents that have reported results thus far, 96.2% have beat earnings expectations alongside a surprise factor of 27.4%.  This surprise factor is well-above the long-term surprise factor (since 1994) of 3.6%.

Over the past four quarters (19Q4-20Q3), the average earnings surprise factor has been 12.4%, which is largely contributed by the high surprise factor of 19.6% and 22.9% in 20Q2 and 20Q3 respectively.  During these two quarters was the peak of the COVID-19 pandemic, where analysts aggressively cut estimates which created an easier benchmark for companies to beat expectations.  If we assume this trend will continue in 20Q4 and apply the prior-four quarter average surprise factor of 12.4% to the companies yet to report, we could potentially see 20Q4 earnings growth improve from -7.8% to 2.4% by the end of earnings season.

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