The earnings recession is back, and the pandemic has made it bigger


The S&P 500 officially returned to an earnings recession with last quarter’s results, and there does not seem to be much hope for a turnaround amid a world-wide pandemic.  

As third-quarter earnings reports begin to flood in this week, analysts expect a third consecutive quarter of double-digit percentage declines in profit, which would mean corporate earnings declined year-over-year in six of the past seven quarters and in the first three quarters of the past two calendar years. A slight gain of less than 1% in the fourth quarter of 2019 is the only thing standing between the S&P 500 SPX and a nearly two-year-long earnings recession.

The COVID-19 pandemic accelerated the corporate earnings downturn in the first half of the year, especially for sectors like airlines, hospitality, and energy. Only three sectors—health care, information technology, and utilities—delivered positive profit growth in the second quarter. 

All 11 sectors of the S&P 500 are expected to suffer an earnings decline in the coming earnings season, according to analyst estimates, and collectively analysts expect an earnings decline of more than 20%. The FactSet consensus calls for a 20.5% drop in aggregate net income for the third quarter, following a 31.4% plunge in the second quarter and a 14% decrease in the first quarter. The biggest current change is that sales are also declining now — after revenue continued to grow throughout the earnings recession this year and through the first quarter of 2020, sales declined 9.2% in the second quarter and are expected to drop 3.5% in the current crop of reports.

Full earnings preview: U.S. corporate earnings reports will shine a light on the uneven playing field in the year of the pandemic

There were many “outsized earnings surprises” in the second quarter, Credit Suisse Chief U.S. Equity Strategist Jonathan Golub wrote, helping the index exceed more dire expectations. He anticipates the beat train to keep rolling forward with third-quarter reports, though that might not mean much for shares of companies that deliver positive surprises: Stock movement following earnings beats was “extremely muted” last time around, Golub said in a note to clients. 

Recent quarters have highlighted how large-technology companies have an outsize influence on the S&P 500’s profit performance due to the index’s market-capitalization weighting. Sizable earnings beats from Amazon.com Inc.
AMZN,
+4.66%,
Apple Inc.
AAPL,
+5.18%
and Microsoft Corp.
MSFT,
+2.12%
helped improve the index’s performance in the June quarter, but Apple is expected to post a 10% year-over-year decline in net income for the September quarter. Apple had some availability of its new iPhones in late September 2019, but the company pushed this year’s launch into the calendar fourth quarter, which will likely impact its relative performance. 

For more: Apple’s 5G iPhone launch has investors hoping for ‘unprecedented upgrade cycle’

Tech is expected to stay dominant when looking at the whole of the year, however, as Golub highlights that 52% of the S&P 500 by market capitalization is projected to record 2020 earnings per share above 2019 totals, driven by the tech sector’s size and performance. 

While the early stretch of this earnings season could be more crazed than normal if companies try to get their reports out ahead of the Nov. 3 election, this week is still relatively tame. Financials and airlines are the biggest themes, with Delta Air Lines Inc.
DAL,
-0.73%,
United Airlines Holdings Inc.
UAL,
-1.75%,
and the big banks on the docket. In all, 27 members of the S&P 500 and five Dow Jones Industrial Average
DJIA,
+0.86%
components are expected to report.

Here’s what to watch for in the week ahead.

Making bank

Strong fee-income trends and better-than-feared credit quality could offer some relief to the banking sector, according to J.P. Morgan analyst Vivek Juneja, who expects the big banks to deliver earnings beats for the September quarter. 

While recessionary periods aren’t usually kind to bank stocks, investors could be in for some positive surprises this time around since financial institutions are better capitalized and beginning to see the impacts of macroeconomic improvements. The biggest banks are able to benefit from investment-banking and asset-management business, as well.

Bank earnings preview: Get ready for a good earnings season for big U.S. banks

JPMorgan Chase and Co.
JPM,
+0.41%
and Citigroup Inc.
C,
+0.77%
kick off bank earnings Tuesday morning, followed by Bank of America Corp., Goldman Sachs Group Inc.
GS,
+2.61%,
and Wells Fargo & Co.
WFC,
+0.55%.
Wednesday morning. Morgan Stanley
MS,
+2.23%
is up a day later, and the company should detail its asset-management strategy now that it’s planning to acquire Eaton Vance Corp. shortly after closing its deal for E-Trade Financial. 

Up in the air

As the airlines look for government relief amid mounting layoffs and weak travel demand, a number of big names will face investors to detail more about how the pandemic is affecting the air-travel business. 

The big airlines are “treading water,” according to Cowen & Co. analyst Helane Becker. She expects companies to focus less on liquidity issues this time around given some recent capital raises, though she worries about a slow snapback in demand. In her view, domestic leisure travel demand might actually be back to pre-pandemic levels already in part due to big fare discounts, but business and international travel continue to struggle. 

Delta is first on deck with its Tuesday morning result, while United follows Wednesday afternoon. 

Health check

Joining JPMorgan and Goldman Sachs in the week ahead are fellow Dow components Johnson & Johnson
JNJ,
+0.82%
on Tuesday morning, UnitedHealth Group Inc.
UNH,
+1.13%
on Wednesday morning, and Walgreens Boots Alliance Inc.
WBA,
+2.77%
on Thursday morning.

Analysts surveyed by FactSet expect the health-care sector to be the best performer in the S&P for the third quarter, modeling a 0.6% decline in aggregate net income. Johnson & Johnson’s report will be especially notable given the company’s work to develop a potential COVID-19 vaccine.



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