This earnings season may be one to forget. We will see one of the biggest year-over-year quarterly declines in S&P 500 Index profits ever, and we will hear a lot about uncertainty facing corporate America as COVID19 continues to impact many companies in the United States and globally. But it may not all be negative.
ESTIMATES MAY BE TOO LOW
The unprecedented nature of the COVID-19 lockdowns and widespread withdrawal of corporate guidance has set up an unpredictable earnings season. The magnitude of the decline we are likely to see may make this an earnings season to forget.
As tough as it is to find a bright side in an estimated 40% collapse in S&P 500 Index earnings per share (EPS), there are several reasons to think the season may be better than analysts’ estimates have suggested. First, second quarter guidance has been better than average—55% of the guidance that has been provided has been negative, well below the five-year average of 69%, according to FactSet.
Second, recent economic data has mostly exceeded expectations, particularly for jobs and retail sales. The Citigroup Economic Surprise Index—a measure of the frequency that economic data is exceeding expectations—stands at an all-time record high for the United States. Bloomberg’s version of the same measure is very close to a record high.
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The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
Please read the full Midyear Outlook 2020: The Trail to Recovery publication for additional description and disclosure.