Q4 Earnings: The Beat Goes On
Yes, we’re witnessing ferocious partisanship in Washington, as calls mount for retribution against President Trump for helping to incite last week’s deadly riots on Capitol Hill. And yes, the coronavirus pandemic is resurgent. But as fourth-quarter corporate earnings season gets underway this week, I’m reminded of the classic 1967 pop tune: The Beat Goes On.
Despite economic damage from COVID-19, quarterly earnings performance during the pandemic has consistently beaten expectations. The pandemic winners, such as Big Tech and multimedia, have been enjoying better-than-feared top and bottom line growth as consumers turn to digital products and devices during quarantine. In the latest quarterly results, we’re likely to see the earnings beat go on.
To be sure, for calendar year 2020, S&P 500 companies on average are expected to report a decline in earnings per share (EPS) of -13.3% and a decline in revenue of -1.6%, according to research firm FactSet. However, those figures are considerably better than initial estimates. What’s more, for Q1 2021, analysts are projecting EPS growth of 16.5% and revenue growth of 3.9%.
On Monday, stocks pulled back from record highs and snapped a four-day winning streak, as investors observed fast-moving efforts in the nation’s capital to impeach Donald Trump a second time. The Dow Jones Industrial Average fell 89.28 points (-0.29%), the S&P 500 declined 25.07 points (-0.66%), and the tech-heavy NASDAQ slipped 165.54 points (-1.25%). The CBOE Volatility Index (VIX), aka “fear gauge,” spiked more than 13%.
The U.S. dollar rose Monday, continuing its increase of recent days, a sign that investors expect U.S. economic growth to outpace national economies overseas. U.S. bond yields also have been rising, making the greenback more attractive. In pre-market futures trading Tuesday, stocks were edging higher.
During Q4 2020, analysts raised EPS projections for S&P 500 companies for the quarter. The Q4 bottom-up EPS estimate climbed by 2.3%, to $36.93 from $36.10, during the quarter (see chart).
“Bottom up” is an aggregation of the median EPS estimates for Q4 for all the companies in the index. Typically, analysts reduce earnings estimates during any given quarter.
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.5%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.2%. During the past 15 years (60 quarters), the average decline has been 5.2%.
Q4 2020 represented the second consecutive quarter and only the fourth quarter since Q4 2010 in which the bottom-up EPS estimate increased during the quarter.
Six sectors recorded an increase in their bottom-up EPS estimate during Q4, led by financials (to $8.08 from $6.82), materials (to $4.48 from $4.14), and communication services (to $2.20 from $2.06). Five sectors recorded a decline in their bottom-up estimate during Q4, led by energy (to $0.17 from $0.60).
With a new year underway, it’s instructive to see where analysts are the most optimistic and pessimistic in terms of their Buy, Sell, or Hold ratings for stocks in the S&P 500. The latest data from FactSet shows that their views have gotten more bullish in recent weeks.
Overall, there are 10,361 ratings on stocks in the S&P 500. Of these 10,361 ratings, 53.6% are Buy ratings, 39.6% are Hold ratings, and 6.8% are Sell ratings.
At the sector level, analysts are most optimistic about the energy (62%), health care (60%), and information technology (59%) sectors. These three sectors have the highest percentages of Buy ratings.
Some beaten-down sectors are home to appealing value plays, but others will take a long time to bounce back. Bargain hunters must choose wisely.
One shrewd bet for 2021 is the energy sector, as reflected by the high level of analyst Buy ratings. The rapid implosion of oil demand and prices in early 2020 shocked even veteran energy pundits, sending the shares of energy companies into the cellar.
However, the economic recovery seems to be on firm ground in 2021 and many energy companies have gotten their balance sheets in fitter shape. If you’re looking for value-priced growth stocks in a pricey overall market, the energy sector beckons.
Cannabis laws: a new leaf…
Another sector to consider in the new year? Marijuana.
The House last month passed with overwhelming bipartisan support the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which would lift federal restrictions on pot.
MORE this year faces excellent odds of passage in a Senate run by Sen. Chuck Schumer (D-NY), who is generally in favor of the normalization of marijuana laws. President-elect Joe Biden has indicated that he would sign the bill.
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