Third quarter earnings season has been outstanding relative to expectations by many measures. Some of the highlights:
- S&P 500 Index earnings are tracking to a 7.5% year-over-year decline, as shown in the LPL Chart of the Day, more than 14 percentage points above expectations when earnings season began.
- If the earnings beat rate of 86% holds with 10% of companies yet to report, it would mark the highest percentage of companies to exceed consensus earnings estimates since FactSet began tracking this statistic in 2008.
- On average, S&P 500 companies have beaten consensus earnings estimates by more than 18%, below last quarter’s 22% clip when analysts were pretty much guessing, but one of the best numbers recorded in recent decades.
- While S&P 500 earnings fell compared with prior-year levels, earnings for the Russell 1000 Growth Index actually rose 14% year over year during the quarter.
- Earnings estimates for the fourth quarter rose 1.8% during October, the best increase during the first month of a quarter since the first quarter of 2018, which was artificially boosted by corporate tax cuts via the Tax Cut and Jobs Act of 2017. Historically estimates tend to drop during earnings season.
“We believe the huge upside surprise in earnings may get more attention as more political uncertainty clears,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “S&P 500 companies have a shot at returning to pre-pandemic levels of corporate profits in 2021, which we didn’t think was possible just a couple of months ago. We have to re-evaluate how much earnings power corporate America will have post-pandemic.”
Looking forward, it’s fair to say that—after seeing such strong third quarter results and record progress on vaccine development—we expect corporate America in aggregate to reach pre-pandemic levels of profitability sooner than we had anticipated just a month ago. The cost efficiencies companies have gained during the pandemic will bear fruit once the pandemic is over, and we think analysts will be surprised by how profitable S&P 500 companies will be once the economy is fully reopened.
At the same time, recent COVID-19 spread and renewed restrictions that may follow could slow the pace of the economic recovery and remain a risk to the earnings rebound while we wait for a vaccine(s) to be distributed in the months ahead. We also must watch the political landscape and tax and regulatory changes that may come along.
Look for more on the strong third quarter earnings season in our next Weekly Market Commentary due out Monday.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking 1-05078549