Earnings Watch: Can Q4 earnings swing into growth? Earnings Watch: Can Q4 earnings swing into growth? Earnings Watch: Can Q4 earnings swing into growth?

Earnings Watch: Can Q4 earnings swing into growth?

Equities 6 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  The Q4 earnings season was off to a mixed start last week with especially the negative response to earnings from three major US banks on Friday. We maintain our positive view on US banks due to more stimulus and our conviction idea for 2021 being reflation. We also take a look at long-term changes in quarterly earnings and how the equity market has mostly been carried by lower discount rate of future cash flows rather than earnings growth. Finally, we take a look at this week's most important earnings releases.


Last week’s earnings releases were the starter before the main course starts this week. Major US banks reporting on Friday were selling off on back of Q4 earnings leading the broader equity declines into the weekend. As we alluded to in our review of these banking earnings, the market was overly pessimistic on those earnings as the outlook was improving in the banks’ earnings statement and those outlooks are naturally not factoring in the upcoming stimulus checks from the new Biden administration. This stimulus will act as a backstop on credit deterioration and bolster the banks’ balance sheets providing the opportunity throughout 2021 to release income from the loan loss reserve account. That coupled with reflation trades and the rising yield curve will help US banks this year. We maintain our positive view on US banks in 2021.

The Q3 earnings season was the turning point with earnings rebounding strongly from the bottom in Q2 and expectations are that earnings will continue to grow q/q. The new restrictions that were introduced across many European countries as the second wave of Covid-19 accelerated have likely prevented corporate earnings from increasing significantly in Q4, and thus it is difficult to expect earnings growth y/y in Q4. However, Q1 helped by base effects will begin to show earnings growth y/y, but for the next year the q/q changes will be the only indicator on earnings we can rely on as the large base effects will make y/y numbers meaningless. Based on the current earnings that are for Q4, the MSCI World Index EPS in Q4 is down 6% compared to S&P 500 where EPS is down 10% y/y.

Our long-term chart on quarterly earnings show another startling fact. Quarterly earnings so far in Q4 2020 for MSCI World is down 0.2% annualized since Q2 2007 which means that after inflation corporate earnings are negative in real terms over 13 years. Only central bank action lowering the discount rate on future cash flows has supported the bull market in global equities. The annualized growth rate for quarterly earnings is 3% in S&P 500, which means a low positive real rate growth rate in US corporate earnings.

This week’s most important earnings are highlighted below with the ones marked in red being those that are worth watching for macro or equity sentiment reasons. Netflix reports tomorrow with a high bar to climb following its disappointing Q3 earnings. Higher subscription price in the US will help on revenue growth but investors will demand strong numbers on net new subscribers or else the stock will be punished.

  • Tuesday: Charles Schwab, Bank of America, Goldman Sachs, State Street, Netflix
  • Wednesday: Interactive Brokers, Kinder Morgan, ASML, Fastenal, Morgan Stanley, Discover Financial Services, P&G, UnitedHealth, US Bancorp, Bank of New York Mellon
  • Thursday: Gilead Sciences, Sandvik, Investor AB, Fifth Third Bancorp, Intel, IBM, Intuitive Surgical, CSX, PPG Industries, Truist Financial, TAL Education, Travelers Cos
  • Friday: Schlumberger, New Oriental Education & Technology
Disclaimer

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 is not intended to and does not change or expand on this. 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 (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.