Worst earnings season since 2011 awaits investors

Worst earnings season since 2011 awaits investors

Equities 7 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  The market is clearly nervous going into the Q2 earnings season as investors have been flying blind into the storm with few companies providing an outlook in Q1. Expectations are looking for the worst earnings in the S&P 500 since late 2011 and if yesterday's disappointing earnings from Walgreens are any guidance it will be some tough weeks ahead for investors. The most important earnings to watch will be those from technology giants such as Amazon, Apple, Alphabet (Google), Facebook, Microsoft and Nvidia as these companies dominate the S&P 500 Index.

Earnings per share in the S&P 500 dropped 31.5% q/q in Q1 and estimates for Q2 as of 30 June were looking for another decline of 14.5% q/q in Q2. This obviously sounds like a recipe for disaster in the equity market, but the fact is that investors have looked over “the earnings valley” in the expectation of a V-shape recovery in the economy and corporate earnings. Sell-side analysts are backing this view with their estimates showing that corporate earnings are expected to be back to Q4 2019 levels at around Q2 2021 (see chart). As we have pointed out for a while on our daily podcast there is a disconnect between this prediction and then the forward curve on dividend futures suggesting corporate profitability measured by dividends will not return pre-COVID-19 levels for many years. Which prediction is correct investors will find out over time and maybe this Q2 earnings season will give clues?

Walgreens reported earnings yesterday with EPS missing estimates by 30% and FY20 outlook that was 13% below estimates on top of 4,000 job cuts in the UK and suspension of its share buyback programme. Investors were not pleased with the outlook and the shares were down 8%. With 80% of the companies in the S&P 500 pulling their guidance in Q1 investors have basically been flying blindly into the storm and mains questions are whether companies will provide guidance again and if not, how investors will react? If Walgreens earnings result is weak guidance, then the Q2 earnings season will shape up to be dramatic confirming why the VIX Index remains elevated around the 30 level.

Source: Saxo Group

Walgreens’ fiscal year is not following the calendar year, so their earnings release yesterday is typically not considered part of the Q2 season but with two fiscal months overlapping the Q2 calendar quarter it is indeed part of this earnings season. But next week is the real start to the Q2 earnings season with 34 companies in the S&P 500 reporting earnings (see list below). We would highlight three things to watch next week: 1) financials, 2) Delta Air Lines, and 3) Netflix. Financials are dominating the week and the focus will obviously be on loan losses which rose dramatically in Q1 and is the key reason why the Fed is recommending banks to hold back on dividends to build up their buffers against loan losses. Delta Air Lines will be the first airliner to report numbers for Q2 and it will be interesting to see whether management dares provide a guidance for FY20. Netflix is part of the group of online/technology stocks that has been pushed higher this year as investors have shifted portfolio exposure towards growth stocks. Netflix is coming into the earnings season with very high expectations for revenue growth (estimates are looking for 23% y/y growth in revenue) and investors are increasingly demanding a visible path to being cash flow positive. 

Name Industry group Market cap (USD mn.) Date Period
PepsiCo Inc Food, Beverage & Tobacco 184,135 7/13/2020 FY20 Q2
JPMorgan Chase & Co Banks 278,132 7/14/2020 FY20 Q2
Fastenal Co Capital Goods 24,756 7/14/2020 FY20 Q2
First Republic Bank/CA Banks 17,524 7/14/2020 FY20 Q2
Delta Air Lines Inc Transportation 16,359 7/14/2020 FY20 Q2
Citigroup Inc Banks 102,945 7/14/2020 FY20 Q2
Wells Fargo & Co Banks 98,564 7/14/2020 FY20 Q2
Bank of New York Mellon Corp/T Diversified Financials 32,894 7/15/2020 FY20 Q2
PNC Financial Services Group I Banks 41,938 7/15/2020 FY20 Q2
UnitedHealth Group Inc Health Care Equipment & Servic 276,130 7/15/2020 FY20 Q2
US Bancorp Banks 51,545 7/15/2020 FY20 Q2
Goldman Sachs Group Inc/The Diversified Financials 70,561 7/15/2020 FY20 Q2
Bank of America Corp Banks 197,544 7/16/2020 FY20 Q2
Cintas Corp Commercial & Professional Serv 27,692 7/16/2020 FY20 Q2
Charles Schwab Corp/The Diversified Financials 43,618 7/16/2020 FY20 Q2
Truist Financial Corp Banks 45,290 7/16/2020 FY20 Q2
Johnson & Johnson Pharmaceuticals, Biotechnology 375,403 7/16/2020 FY20 Q2
Domino's Pizza Inc Consumer Services 15,080 7/16/2020 FY20 Q2
Abbott Laboratories Health Care Equipment & Servic 165,688 7/16/2020 FY20 Q2
Morgan Stanley Diversified Financials 74,859 7/16/2020 FY20 Q2
Netflix Inc Media & Entertainment 223,315 7/16/2020 FY20 Q2
PPG Industries Inc Materials 24,789 7/16/2020 FY20 Q2
JB Hunt Transport Services Inc Transportation 13,183 7/16/2020 FY20 Q2
Citizens Financial Group Inc Banks 9,697 7/17/2020 FY20 Q2
Regions Financial Corp Banks 9,434 7/17/2020 FY20 Q2
Progressive Corp/The Insurance 45,538 7/17/2020 FY20 Q2
Honeywell International Inc Capital Goods 99,220 7/17/2020 FY20 Q2
Dover Corp Capital Goods 13,655 7/17/2020 FY20 Q2
E*TRADE Financial Corp Diversified Financials 10,864 7/17/2020 FY20 Q2
Omnicom Group Inc Media & Entertainment 11,070 7/17/2020 FY20 Q2
Danaher Corp Health Care Equipment & Servic 131,303 7/17/2020 FY20 Q2
Kansas City Southern Transportation 13,573 7/17/2020 FY20 Q2
BlackRock Inc Diversified Financials 84,285 7/17/2020 FY20 Q2
State Street Corp Diversified Financials 21,702 7/17/2020 FY20 Q2

Looking further into the future the list below shows the 30 largest stocks in the S&P 500 Index. These are the key names to watch as they represent 44% of the S&P 500. Already by 31 July, after three weeks of earnings, we will know the shape and hopefully a trajectory of US corporate earnings. Technology earnings hold the key to overall market sentiment and levels in US equities so names such as Amazon, Alphabet, Microsoft, Facebook, Apple and Nvidia must deliver for equities to remain at current levels. Our advice to investors is to be cautious going into the Q2 earnings season and avoiding having full exposure in equities as it could become a volatile summer.

Name Industry group Market cap (USD mn.) Report date
PepsiCo Inc Food, Beverage & Tobacco 184,135 7/13/2020
JPMorgan Chase & Co Banks 278,132 7/14/2020
UnitedHealth Group Inc Health Care Equipment & Servic 276,130 7/15/2020
Johnson & Johnson Pharmaceuticals, Biotechnology 375,403 7/16/2020
Netflix Inc Media & Entertainment 223,315 7/16/2020
Bank of America Corp Banks 197,544 7/16/2020
Microsoft Corp Software & Services 1,625,283 7/22/2020
Intel Corp Semiconductors & Semiconductor 247,350 7/23/2020
AT&T Inc Telecommunication Services 210,473 7/23/2020
Amazon.com Inc Retailing 1,587,420 7/24/2020
Alphabet Inc Media & Entertainment 1,033,912 7/24/2020
Verizon Communications Inc Telecommunication Services 223,203 7/24/2020
Visa Inc Software & Services 373,560 7/28/2020
Pfizer Inc Pharmaceuticals, Biotechnology 185,865 7/28/2020
Facebook Inc Media & Entertainment 697,152 7/29/2020
PayPal Holdings Inc Software & Services 215,141 7/29/2020
Apple Inc Technology Hardware & Equipmen 1,658,880 7/30/2020
Procter & Gamble Co/The Household & Personal Products 303,217 7/30/2020
Mastercard Inc Software & Services 295,692 7/30/2020
Comcast Corp Media & Entertainment 179,326 7/30/2020
Merck & Co Inc Pharmaceuticals, Biotechnology 193,573 7/31/2020
Exxon Mobil Corp Energy 174,879 7/31/2020
Berkshire Hathaway Inc Diversified Financials 434,892 8/3/2020
Walt Disney Co/The Media & Entertainment 210,990 8/4/2020
Cisco Systems Inc Technology Hardware & Equipmen 197,181 8/12/2020
NVIDIA Corp Semiconductors & Semiconductor 258,521 8/16/2020
Home Depot Inc/The Retailing 266,687 8/18/2020
Walmart Inc Food & Staples Retailing 361,782 8/18/2020
salesforce.com Inc Software & Services 180,867 8/23/2020
Adobe Inc Software & Services 221,049 9/15/2020

In terms of sectors the chart illustrates expectations across sectors ahead of earnings. Analysts have remained relatively bullish on utilities, information technology, health care, consumer staples and telecommunication services. In other words, expectations are the highest here and thus represent the biggest downside risk to the market if these expectations are not met. It also worth noting that expectations for earnings in the real estate sector are continuing down which is a bad signal for banks and eventually overall credit flow as worsening collateral on real estate could force banks to tighten credit standards even more. Also note that the energy sector is missing but that is because earnings expectations are down 72% from 23 March and would destroy readability of the chart. The two sectors with the worst expectations are consumer discretionary and energy where analysts are expecting negative aggregate earnings as the lockdowns have hit these two sectors the hardest in Q2.


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