S&P 500 Q4 Earnings Recap: A Positive End To 2020


2020 Q4 earnings season has come to a close. In 2020, we saw earnings decline 12.8% in Q1, 30.6% in Q2, and 6.5% in Q3. The last time we saw growth rates this negative was in 2008-2009.

What may be forgotten as time goes on is how the 20Q1-20Q3 growth rates ended up much better than originally expected. For example, at the peak of the crisis, the 20Q2 and 20Q3 expected earnings growth rate at the beginning of earnings season was -43.0% and -21.4% respectively.

If we compare these expected growth rates vs. the actual growth rate, we see a dramatic improvement in growth expectations during the quarter. In 20Q2, we saw an improvement of 12.4 percentage points (ppts) from the start vs. end of earnings season. 20Q3 saw an improvement of 15.0 ppts.

Turning back to 20Q4, we saw a similar picture. In January, we wrote in our 20Q4 earnings preview post that the earnings surprise factor has been remarkably high compared to long-term averages. More specifically, over the past four quarters (19Q4-20Q3), the average earnings surprise factor has been 12.4% compared to a long-term surprise factor of 3.6%. We made a prediction that if we see similar levels in companies surprising to the upside in 20Q4, we could see the earnings growth rate improve from -10.3% at the start of earnings season to +2.4%.

It turned out that our forecast proved to be correct, for a couple of reasons. The first was that 79.3% of constituents reported earnings above expectations, well above the long-term average (since 1994) of 65%. Second, the 20Q4 earnings surprise factor is currently 15.8%. As a result, the 20Q4 earnings growth rate exceeded our original forecast of 2.4% and currently stands at 4.1%. Comparing -10.3% to +4.1% results in an improvement of 14.4 ppts. This ranks as the fourth largest improvement on record (dating back to 2002 Q3). We can see this data visually in Exhibit 1.

Exhibit 1: S&P 500 Growth Rates – Beginning vs. End of Earnings Season

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