Earnings declined again in the third quarter, but exceeded expectations by more than usual

Ryan Sitarz

Ryan Sitarz, CFA, CFP

Portfolio Specialist

Third-quarter earnings for S&P 500 companies are essentially in (one company remains). Overall, the index posted year-over-year (YoY) revenue and earnings growth of approximately -1% and -6%, respectively. Roughly 85% of companies reported earnings that were better than expected, which is above the long-term average of 65% and the prior four-quarter average of 73%. There was significant variation across sectors (Figure 1). Excluding energy, earnings only declined by about 2%. Healthcare and technology have held up well throughout the pandemic, with eight out of ten healthcare sub-industries posting higher earnings than they did a year ago.

While stockholders certainly prefer earnings that are better rather than worse than expected, the number of firms surprising to the upside has been somewhat discounted — analysts have limited insight into earnings because of the huge swing in activity coming out of the recession and reduced guidance provided by company management. The earnings surprise factor was actually larger in Q2 than it was for Q3, reflecting the worse visibility in the immediate aftermath of the downturn. What’s more remarkable is that Q3 net profit margins ex-financials are now back to pre-COVID levels and consensus estimates are for them to rise to 11.1% in 2021. If the cyclical pick-up in growth does take place as many currently forecast and margins stay elevated, next year’s earnings will be strong. For now, however, earnings growth is negative and, therefore, the Global Perspectives tactical positioning remains defensive.

Figure 1. YoY, third-quarter S&P 500 earnings and revenue growth varies widely across sectors
Figure 1. YoY, third-quarter S&P 500 earnings and revenue growth varies widely across sectors

Source: Refinitiv, data as of 12/14/20.

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