What to Expect From Earnings Szn Starting Next Week

Citigroup, JPMorgan Chase, Wells Fargo and other U.S. banks are gearing up for Q4 earnings season this coming week, and a bulk of S&P 500 companies will follow them over the next month.

The Street expects another down quarter, with S&P 500 earnings plummeting 12% in the final three months of 2020 versus the same period in 2019, and sales are expected to drop 6%. Those numbers would be an improvement over the first and second quarters of 2020, during the widespread lockdowns and before many businesses had adjusted for the pandy. But they would be a step back from Q3 when earnings were down 8.6% YOY on a 3% decline in sales, thanks to the spike in virus cases.

Still, a down quarter is of little consequence. Bullish and progressive investors have had no issue turning a blind eye to the pitfalls of a post-pandy recovery. Instead, they will likely pay more attention to how management teams navigate that future. So long as optimism prevails, the stock market should keep chugging right along.

On top of that, the Q4 reports could be the last challenging ones for a while. As 2021 kicks off, the year-over-year comparisons will get easier. More companies will show growth, needing only to surpass 2020’s low bar. The Street even expects S&P 500 earnings and revenue to outdo 2019’s record levels this year—but with the gains more weighted toward the back half of the year, once vaccines have been widely distributed and the hardest-hit parts of the economy have opened back up.

Rare footage of the Wall Street bull taking a breather.

Shares of cyclical stocks—like energy and industrials—have been heading the market since the fall. Yet the sharpest year-over-year declines are on the horizon for energy companies. Analysts expect a 148% nosedive in earnings for the sector in Q4, while sales are expected to fall 35%. Energy stocks have increased almost 30% since November, buttressed by higher oil prices—probably all that matters for the sector, which is still down 30% since the beginning of 2020.

Industrials’ earnings are forecasted to fall 39% YOY on a 14% downturn in revenue. Those numbers would be better than the prior two quarters, as the global manufacturing recovery has picked up in recent months. The sector’s earnings are expected to return to YOY growth in Q1 of 2021, coupled by sales in Q2. That would better explain S&P 500 industrial stocks’ 12% rally in the past three months. Caterpillar [$CAT], up 23% over that period, reports on January 29. General Electric [$GE] has jumped 71% since early October. It reports on January 26.

The best fundamental performance in Q4 was in health care, consumer staples, and utilities—the classic defensive sectors. Health-care earnings and sales are set to have grown 13.7% and 5.5%, respectively. Staples are seen putting up 11% earnings growth on slightly higher revenue, while utilities could announce a 9.5% jump in sales but a 4% decline in earnings. Yet utilities are off 2.3% since November, while staples have gone up just 1.7%. As long as the Fed and Congress keep printing money, don’t expect a stampede to flow into defensive stocks.

Wall Street and the New York Stock Exchange

Tech stocks, which have trailed cyclicals since the fall, are looking at a challenging earnings season. The group grew earnings and sales in the first nine months of 2020 but now faces a tough comparison to the 2020 period, which featured record sales and earnings for tech. Both measures are forecasted to have dropped last quarter, down roughly 6% and 10%, respectively.

Plan for pressure on inflated multiples if highflying tech firms’ results come in below expectations. They won’t get nearly as much of a pass from investors as industrials or energy will. As for cyclical stocks, their retribution could be put on the back-burner until the pandy has fully run its course. Only then will investors really judge them by their fundamentals again.

Like Friday’s crappy jobs report, Q4 earnings season will paint an at best mixed picture—certainly not one that would support the S&P 500’s 12% rise in the quarter on its own. But for the past several months, investors have been living in the future. Less-bad results than previous quarters and improving guidance should be more than enough to keep them happy.

$XLF YTD (financials)

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