Details Cookies
Important margin product information
CFDs and forex spot transactions are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor lose money when trading CFDs and/or forex spot with this provider. 0.42% of retail clients trading in leveraged products experience a negative account balance after a stop out occurred. You should consider whether you understand how CFDs, forex spot transactions or any of our other products work and whether you can afford to take high risk of losing your money.
Cookie policy

This website uses cookies to offer you a better browsing experience by enabling, optimising and analysing site operations, as well as to provide personalised ad content and allow you to connect to social media. By choosing “Accept all” you consent to the use of cookies and the related processing of personal data. Select “Manage consent” to manage your consent preferences. You can change your preferences or retract your consent at any time via the cookie policy page. Please view our cookie policy here and our privacy policy here

Q3 earnings preview; small caps are shining; Rolls-Royce roars back Q3 earnings preview; small caps are shining; Rolls-Royce roars back Q3 earnings preview; small caps are shining; Rolls-Royce roars back

Q3 earnings preview; small caps are shining; Rolls-Royce roars back

Equities 6 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  Analysts expect S&P 500 earnings to increase 49% q/q as companies are bouncing back from the abyss in Q2. Recent macro figures and many positive earnings surprises make us confident that Q3 earnings will deliver what is needed to sustain the rally in equities. Investors seem to have begun adding reflation and growth bets again with small caps outperforming the past week and other cross assets reflecting this theme. We also take a look at Rolls-Royce that is fighting to survive through a $6.5bn financial deal that starts today with the launch of its senior unsecured USD bonds.

Global equities have settled in a trading range and could stay there for until the US election. Market participants need a new narrative. Yesterday, a new narrative was forming as reflation trades were put on again (growth stocks, small caps, long-term yields higher, gold etc.) partly driven by a positive spin on a Biden victory and higher probability of Democrats delivering a clean sweep. In that case, the recent House bills of $2.2trn could move through the Senate and deliver a sizeable boost to the US economy.

Q3 earnings must deliver

That is a strong narrative, but in the meantime equity markets need to see Q3 earnings rebound. Elevated equity valuations are discounting a significant rebound in earnings and analyst estimates are also reflecting this with expectations looking for a 49% q/q increase in Q3 earnings per share in the S&P 500 Index. In other words, there are steep expectations going into the Q3 earnings season which really kicks into gear next week with US financials. Despite a strong rebound in earnings analysts do not expect earnings to soar past pre Covid-19 earnings until Q2 2021.

We remain quite bullish on the Q3 earnings season. Many recent earnings releases (those ending 31 August) from companies not following the calendar year have been much better than estimated with positive reactions in the stock price. Yesterday’s record August retail sales in Europe and better than expected ISM Service Index for September in the US are bolstering our view that most companies are well ahead of expectations and that earnings estimates are mostly too conservative.

Small caps are feeling the love

The reflation we have covered today on the back of yesterday’s cross market price action has also been reflected in small caps. Expectations of more stimulus in both the US and Europe will naturally lift the part of the equity market that suffered the most during the severe lockdowns earlier this year and that was certainly smaller companies. The stronger than expected macro figures lately are also underpinning a growth surprise and investors seem to be betting on this theme through small cap stocks. As the chart below shows small caps in Europe started outperforming last week and has accelerated this week. The same pattern shows up in US equities.

Source: Bloomberg

Rolls-Royce starts tapping bond market

Rolls Royce shares are up 10% again today extending the gains to 35% from the lows on Friday. The jet-engine maker is starting its senior unsecured noted in USD which is part of its $6.5bn rescue plan to get the company through its demand shock due to Covid-19. Analysts expect revenue to decline 34% in 2020 and delivering negative free cash flow of £4bn which is quite significant since the company’s enterprise value is only £7.2bn. The current net debt is around £4.5bn and expected to rise another £1bn under the new financing plan. To not lose grip of the situation Rolls-Royce has to keep its net-debt-to-EBITDA at no more than 3x which implies that EBITDA should quickly get back to £1.8bn which is where the company was in 2016 before things came apart. Rolls-Royce is a very high risk opportunity for investors, also reflected in its 9.2% 1-year default probability (Bloomberg’s default risk model), but carries an attractive risk-reward ratio if the economy heals faster than expected and commercial aviation can come back. But that is a very big unknown.

Source: Saxo Group
The five-year chart is EU compliance requirement.  
Source: Bloomberg


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank (Schweiz) AG
Beethovenstrasse 33

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.