Market shrugs off historically bad earnings season
EARNINGS FOR big companies in the United States were historically bad last quarter, and yet still much better than expected.
CEOS ACROSS the country are almost finished telling investors how their companies fared from April through June, when pandemic-related shutdowns pummelled the economy into the worst recession in decades. With just a handful of S&P 500 companies still to report, their combined profit is down roughly 33 per cent from a year earlier, according to FactSet.
That’s on par with the 35 per cent plummet recorded in the first quarter of 2009, during the worst of the Great Recession.
But analysts came into this reporting season expecting even worse. They had forecast a 44 per cent plunge. And on Wall Street, beating expectations is often more important than whether earnings rise or fall.
The not-as-terrible-as-expected results are bolstering investor confidence that the economy is recovering from its spring free fall. The latest earnings reports helped the S&P 500 erase its remaining losses and ascend to a new all-time high.
Stocks’ rocket ride of more than 50 per cent began in March when the US Federal Reserve and Congress promised trillions of dollars in aid. They continued to rise as reports showed budding improvements in the economy.
Investors pay particular attention to corporate profits because stock prices tend to track them over the long term.
“Earnings are the stock market’s lifeblood, and they serve as the basis for how most investors value companies,” Chris Haverland, a strategist at Wells Fargo Investment Institute, wrote in a recent report.
Tech companies continued to play a huge role in the stock market delivering better-than-expected corporate profits last quarter.
Analysts thought tech companies’ earnings weakened by nearly 10 per cent in the spring from a year earlier. But the pandemic has accelerated work-fromhome and other trends that benefit the sector, so instead, they’re on track to report modest growth for the quarter.
Apple was a headliner. It said its earnings per share jumped 18 per cent to US$2.58. That blew past analysts’ expectations of a drop to US$2.05.
Earnings strength was nowhere close to uniform, however. Some of the pandemic’s obvious losers failed to meet even the low bar that analysts had set. Delta Air Lines and United Airlines both reported wider losses than Wall Street forecast, for example.
Energy companies also struggled after prices in a corner of the oil market dove briefly below zero during the quarter. Chevron swung to a quarterly loss of US$8.3 billion from a profit of US$4.3 billion a year earlier. Its adjusted loss per share of US$1.59 was far steeper than the 93 cents-a-share loss that analysts forecast.
The earnings decline for the S&P 500 was concentrated in just four sectors of the market: companies that depend on discretionary spending by consumers, energy producers, financial companies and industrial businesses, according to Jeff Buchbinder, equity strategist at LPL Financial.
As the pace of lay-offs across the country slows and retail sales pick up, Wall Street has become less pessimistic about the path of profits going forward. Hopes for a potential vaccine for COVID-19 have also prodded analysts to raise their forecasts.
Wall Street expects S&P 500 earnings per share to drop 23.1 per cent in the current quarter, according to FactSet. That’s not as bad as the 24.7 per cent drop it forecast just before this earnings reporting season started.
Perhaps more importantly, analysts are once again ratcheting up their 2021 forecasts. Now they’re calling for earnings per share of US$164.27 across S&P 500 companies, up from an estimate of US$162.04 in May.
Of course, that optimism is built on a lot of assumptions, chief among them the belief that a vaccine will help the economy quickly return to normal. Other risks hanging over the market include rising tensions between the United States and China and the current impasse on Capitol Hill about whether to deliver more aid to the limping economy.
And companies will need to deliver stronger profits to validate the higher prices that investors have sent their stocks. Share prices of companies in the S&P 500 are trading at nearly their most expensive level relative to their expected earnings since the dot-com bubble was deflating.
Analysts are once again ratcheting up their 2021 forecasts, calling for EPS of US$164.27 across S&P 500 companies