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. 

NameIndustry groupMarket cap (USD mn.)DatePeriod
PepsiCo IncFood, Beverage & Tobacco184,1357/13/2020FY20 Q2
JPMorgan Chase & CoBanks278,1327/14/2020FY20 Q2
Fastenal CoCapital Goods24,7567/14/2020FY20 Q2
First Republic Bank/CABanks17,5247/14/2020FY20 Q2
Delta Air Lines IncTransportation16,3597/14/2020FY20 Q2
Citigroup IncBanks102,9457/14/2020FY20 Q2
Wells Fargo & CoBanks98,5647/14/2020FY20 Q2
Bank of New York Mellon Corp/TDiversified Financials32,8947/15/2020FY20 Q2
PNC Financial Services Group IBanks41,9387/15/2020FY20 Q2
UnitedHealth Group IncHealth Care Equipment & Servic276,1307/15/2020FY20 Q2
US BancorpBanks51,5457/15/2020FY20 Q2
Goldman Sachs Group Inc/TheDiversified Financials70,5617/15/2020FY20 Q2
Bank of America CorpBanks197,5447/16/2020FY20 Q2
Cintas CorpCommercial & Professional Serv27,6927/16/2020FY20 Q2
Charles Schwab Corp/TheDiversified Financials43,6187/16/2020FY20 Q2
Truist Financial CorpBanks45,2907/16/2020FY20 Q2
Johnson & JohnsonPharmaceuticals, Biotechnology375,4037/16/2020FY20 Q2
Domino's Pizza IncConsumer Services15,0807/16/2020FY20 Q2
Abbott LaboratoriesHealth Care Equipment & Servic165,6887/16/2020FY20 Q2
Morgan StanleyDiversified Financials74,8597/16/2020FY20 Q2
Netflix IncMedia & Entertainment223,3157/16/2020FY20 Q2
PPG Industries IncMaterials24,7897/16/2020FY20 Q2
JB Hunt Transport Services IncTransportation13,1837/16/2020FY20 Q2
Citizens Financial Group IncBanks9,6977/17/2020FY20 Q2
Regions Financial CorpBanks9,4347/17/2020FY20 Q2
Progressive Corp/TheInsurance45,5387/17/2020FY20 Q2
Honeywell International IncCapital Goods99,2207/17/2020FY20 Q2
Dover CorpCapital Goods13,6557/17/2020FY20 Q2
E*TRADE Financial CorpDiversified Financials10,8647/17/2020FY20 Q2
Omnicom Group IncMedia & Entertainment11,0707/17/2020FY20 Q2
Danaher CorpHealth Care Equipment & Servic131,3037/17/2020FY20 Q2
Kansas City SouthernTransportation13,5737/17/2020FY20 Q2
BlackRock IncDiversified Financials84,2857/17/2020FY20 Q2
State Street CorpDiversified Financials21,7027/17/2020FY20 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.

NameIndustry groupMarket cap (USD mn.)Report date
PepsiCo IncFood, Beverage & Tobacco184,1357/13/2020
JPMorgan Chase & CoBanks278,1327/14/2020
UnitedHealth Group IncHealth Care Equipment & Servic276,1307/15/2020
Johnson & JohnsonPharmaceuticals, Biotechnology375,4037/16/2020
Netflix IncMedia & Entertainment223,3157/16/2020
Bank of America CorpBanks197,5447/16/2020
Microsoft CorpSoftware & Services1,625,2837/22/2020
Intel CorpSemiconductors & Semiconductor247,3507/23/2020
AT&T IncTelecommunication Services210,4737/23/2020
Amazon.com IncRetailing1,587,4207/24/2020
Alphabet IncMedia & Entertainment1,033,9127/24/2020
Verizon Communications IncTelecommunication Services223,2037/24/2020
Visa IncSoftware & Services373,5607/28/2020
Pfizer IncPharmaceuticals, Biotechnology185,8657/28/2020
Facebook IncMedia & Entertainment697,1527/29/2020
PayPal Holdings IncSoftware & Services215,1417/29/2020
Apple IncTechnology Hardware & Equipmen1,658,8807/30/2020
Procter & Gamble Co/TheHousehold & Personal Products303,2177/30/2020
Mastercard IncSoftware & Services295,6927/30/2020
Comcast CorpMedia & Entertainment179,3267/30/2020
Merck & Co IncPharmaceuticals, Biotechnology193,5737/31/2020
Exxon Mobil CorpEnergy174,8797/31/2020
Berkshire Hathaway IncDiversified Financials434,8928/3/2020
Walt Disney Co/TheMedia & Entertainment210,9908/4/2020
Cisco Systems IncTechnology Hardware & Equipmen197,1818/12/2020
NVIDIA CorpSemiconductors & Semiconductor258,5218/16/2020
Home Depot Inc/TheRetailing266,6878/18/2020
Walmart IncFood & Staples Retailing361,7828/18/2020
salesforce.com IncSoftware & Services180,8678/23/2020
Adobe IncSoftware & Services221,0499/15/2020

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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