Q3 earnings outlook

A perspective from E*TRADE Securities 10/22/20

It may feel like a lifetime since COVID-19 derailed the year, but truth be told, the third quarter was only the second full earnings season to capture the pandemic’s corporate fallout. 

The good news is that earnings aren’t expected to fall as drastically as they did in Q2. (When all was said and done, the second quarter actually didn’t turn out to be as bad as analysts feared.) The not-as-good news is that the bar is now a little higher, meaning results may not top estimates quite as easily as—or to the extent—they did last quarter.

As of October 21, approximately 20% of S&P 500® companies had reported,1 with results concentrated in the financials, consumer staples, and industrials sectors. Beyond a review of public company results though, the season may hold clues about how leaders of the world’s largest businesses view the future. These nuggets of insight can be helpful, especially given the uncertainty surrounding another stimulus package, the election, and the course of the coronavirus in the fall and winter months. 

Here’s what things look like as we get into the thick of Q3 earnings season.

Still cloudy, but definitely brighter

According to FactSet, earnings for companies in the S&P 500 are projected to fall roughly 20% from last year’s third quarter. This would mark the second biggest year-over-year decline since Q2 2009, when earnings dropped 27%, only trailing Q2 of this year, when earnings sank 32%.2 

On the bright side, third quarter results could signal the beginning of a turnaround. Analysts are forecasting a smaller 12% decline in Q4, before 14% and 45% growth in Q1 and Q2 of 2021, respectively.

Source: FactSet Research Systems, October 21, 2020

Results so far are generally positive…

The major US banks kicked off earnings season on a mostly positive note. On the whole, strong trading and investment banking performance helped boost revenue, while the amounts set aside for loan defaults shrank significantly.

Bank earnings often set the tone for the season and, particularly in the current economic environment, provide a gauge on the health of the American consumer and small businesses. After stashing away billions for potential loan losses earlier in the year, the top firms appear to believe they are prepared to handle defaults—which may be a good sign that the economy is trending in the right direction. (Despite solid results, financial stocks are one of the S&P 500’s weakest sectors, still down double digits year to date compared to the broader index’s roughly 6% gain.)

The majority of companies reporting to date have beaten estimates, and many have seen Q4 estimates raised as a result. Early reporters like FedEx, CarMax, AutoZone, and Nike are among the outperformers.3

It’s not all blue skies, though. Some major airlines posted worse-than-expected results, even after cutting operating costs. And with more than half of results not yet accounted for, there is a long way to go.

… But uncertainty remains

We may be off to a positive start, but many companies still aren’t providing longer-term guidance, which means investors may be in for a few surprises in the weeks and months ahead. More than 25% of the companies making up the S&P 500 haven’t offered earnings insight for Q4 or 2021.3 

That said, only one sector, health care, is expected to report year-over-year earnings growth for the third quarter, while utilities, technology, and consumer staples are expected to post modest declines. Energy, industrials, and consumer discretionary sectors are predicted to report the steepest declines.2

Source: FactSet Research Systems, October 21, 2020

By comparison, tech stocks have led market performance this year, rising 31%, while health care and consumer staples sectors have posted more muted 6% gains. Utilities are down about 1.5% for the year, and energy is the weakest sector, down 48% year to date.1


Earnings season is a good time to check in on the financial health of companies—and more broadly, sectors—especially after a record stock market rally. But with other factors currently dominating headlines, third-quarter results run the risk of being overshadowed. Investors may want to keep their eyes peeled for developments in some key areas:

  • Jobs: Several big employers, including Disney and American and United Airlines, have announced significant layoffs in recent weeks—a potential warning sign of the pressures facing many companies.
  • Beats vs. misses: The strong second-quarter earnings performance was largely attributed to humble expectations. As expectations rise, some companies may not be able to clear the bar with the same ease moving forward. In particular, stay-at-home names that really took off during lockdown may be vulnerable to disappointments.
  • Guidance: What business leaders say about the future can often influence stock performance just as much as (if not more than) the results themselves. While the number of firms providing future guidance is below average, of those that have offered insight, more have been positive than negative.3

After stumbling in the last month of Q3, stocks have been battling bouts of volatility through October. While this earnings season won’t deliver a crystal ball, the insight gleaned from corporate America may help reduce some uncertainty—don’t overlook the results. And above all, stay focused on individual timelines, long-term goals, and risk tolerance.

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  1. FactSet Research Systems, as of October 21, 2020
  2. FactSet Earnings Insight, October 16, 2020, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_101620A.pdf
  3. CNBC, “Third-quarter earnings season kicks off this week and results should be much better than expected,” 10/12/20, https://www.cnbc.com/2020/10/12/third-quarter-earnings-season-kicks-off-this-week-and-results-should-be-much-better-than-expected.html

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