By Roman Chuyan, CFA
- Operating earnings for the first quarter dropped by 14%
- This is the biggest decline in the S&P 500 earnings since 2009
- The price-to-earnings ratio for the S&P 500 is up to 20.2, well above average and its 2019 level
Earnings reporting for the first quarter of 2020 is nearly completed, with 90% of the companies included in the S&P 500 index reporting their results. In this article, I provide an overview of how earnings are trending so far. The numbers below are mostly actual results, with estimates for 10% of companies that still haven’t reported. I also have articles coming up on economic update and our outlook for the S&P 500 – to stay tuned, bookmark, and revisit our ETF Strategist page.
Operating earnings for the first quarter dropped by 13.8%, the largest decline since Q3-2009. A below-average 65% of S&P 500 companies beat already-lowered analyst expectations. The travel halt and the widespread coronavirus-related lockdowns in March are the primary reason for the decline. Other factors include the crash in oil and other commodity prices that hit the Energy and Materials sectors hard. The drop comes after four consecutive quarter of flat-to-negative growth (see chart above). The trailing 12-month operating price-to-earnings ratio for the S&P 500 is back at 20.2, well above average and above its 2019 level.
There’s a sharp divide between “bad” and “okay” sectors this quarter. Five “bad” sectors exhibited double-digit percentage declines in earnings from the same quarter last year. The Consumer Discretionary sector is the worst performer with a -52% plunge in earnings, followed by Financials (-44%), which lagged analyst consensus as of March 31st by the most, 35%.
Six “okay” sectors exhibited single-digit growth in earnings. The defensive Health Care (+7%) and Utilities (+6.5%) sectors lead growth this quarter. The traditionally growth-oriented Tech sector came in at a low-but-positive 4.6% growth. The Energy sector beat consensus estimates by the largest margin, +12.4%, by reporting a smaller-than-expected 28% drop in earnings.
Where do earnings go from here? Looking at the recent sharp market rebound, some strategists expect a quick rebound in earnings. I think this is misguided. We entered a severe recession in Q1 (-4.8% annualized GDP), and Q2 looks to be much worse – most economic numbers are the worst on record. Earnings typically continue to decline past the end of a recession and often go negative. For example, they dropped by 16% YoY Q3-2009, even though the recession ended in Q1-2009.
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