Early earnings standings

A perspective from E*TRADE Securities 01/28/21

We’re in the thick of a pivotal earnings season: Results for the final quarter of 2020 will close the books on a historic year and may set the tone for the year ahead. 

Will corporate performance help justify the S&P 500’s® record-setting run, or are investors poised for disappointment? What clues will the season hold about how leaders of the world’s largest companies view the future?

All eyes will be on the Street for the next few weeks as these themes play out. Here are where things currently stand.

The scorecard

Approximately 25% of S&P 500 companies had reported as of January 27. According to FactSet estimates, earnings are projected to fall roughly 5% from last year’s fourth quarter, which would mark the fourth straight quarter of year-over-year earnings declines. 

There’s a caveat, though. So far, the number of companies beating earnings estimates is well above average, and they’re also surpassing estimates by a wider-than-average margin, meaning it’s possible the S&P will actually report year-over-year earnings growth when all is said and done.

At the sector level, financials, health care, materials, information technology, and consumer staples are projected to report earnings growth. The remaining sectors—energy, industrials, consumer discretionary, communication services, real estate, and utilities—are expected to post declines.1

Source: FactSet, as of 1/27/20

The highlights

To date, results have been concentrated in financials, consumer staples, and industrials. Here are some takeaways:  

  • Big banks: The major US banks kicked off earnings season on a positive note. Overall, strong trading and investment banking performance helped boost revenues, while funds set aside for loan defaults shrank. Financial leaders were optimistic about the economy, citing vaccines and stimulus as drivers for their improved forecasts.2 Still, uncertainty lingers. While retail customers have been resilient, many banks anticipate there will come a time when stimulus funds run out and unemployment benefits dry up, and borrowers may no longer be able to keep up with payments.
  • Airlines: It may come as no surprise that airline earnings continue to be dismal, given the hit air travel has taken during the pandemic. While execs expect the availability of vaccines to help fuel a recovery for the industry, they aren’t anticipating a quick turnaround this year. United Airlines said Q1 revenue will likely be less than 65% of Q1 2019, and the company doesn’t expect to reach pre-pandemic levels until 2023.3 On a brighter note, Delta announced it would bring back hundreds of previously furloughed pilots by this summer.4
  • Big tech: Microsoft,5 Apple, and Facebook had exceptional quarters, but investor enthusiasm in Apple and Facebook appeared muted (at least initially) following announcements. Possible sources of disappointment: Apple didn’t offer official guidance for Q1,6 and Facebook warned of potential headwinds facing its advertising business.7 
  • Best of the rest: Earnings from blue chip stocks like 3M, Johnson & Johnson, and Verizon topped expectations. Meanwhile, shares of General Electric rose even after the company slightly missed its headline number, but offered an upbeat outlook for the year ahead.8

E*TRADE customers can log on to their accounts and view the market calendar (Markets & Ideas > US Markets > Market Calendar) for an up-to-date earnings schedule. 

Investing themes

We still have a few weeks and hundreds of announcements to go before the season’s results are set in stone, and there will undoubtedly be surprises along the way. A few things to keep in mind about earnings and stock performance: 

  • The gift of guidance: What business leaders say about the future can often influence stock prices just as much as—if not more than—the results themselves. Only a handful of firms have offered forward guidance for Q1 2021, but the majority have been positive.1
  • Health check: Earnings season is a good time to check the financial health of companies—and more generally, sectors—especially when the broad market is hovering near record levels. Investors may want to look at the underlying fundamentals of the assets in their portfolios and consider their potential to grow or provide consistent value.
  • Value opportunities: Analysts expect earnings to grow 18% and 48% in Q1 and Q2, respectively.1 When looking for investing opportunities, consider what areas of the market may be attractively priced—some segments may be more expensive than others relative to earnings growth.

On a final note, investors should also keep in mind that earnings announcements can be volatile events. A stock’s immediate reaction to earnings news—good or bad—isn’t necessarily a reliable predictor of its longer-term direction. Stay focused on individual timelines, long-term goals, and risk tolerance.

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  1. FactSet Earnings Insight, January 22, 2021, https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_012221.pdf?hsCtaTracking=31d0f488-5c02-4193-b93b-f1708067f4fa%7Cb994622e-6b82-4c98-ad34-76c848088314
  2. The New York Times, “With Vaccines and Stimulus on the Way, Banks Brighten Their Outlook,” 1/15/21, https://www.nytimes.com/2021/01/15/business/jp-morgan-citigroup-wells-fargo-earnings.html
  3. CNBC, “United’s losses mount but airline expects to surpass 2019 margins in 2023,” 1/20/21, https://www.cnbc.com/2021/01/20/united-airlines-ual-earnings-q4-2020html.html
  4. CNBC, “Delta plans to bring back 400 pilots, signaling optimism about future air travel,” 1/25/21, https://www.cnbc.com/2021/01/25/delta-plans-to-bring-back-400-pilots-signaling-optimism-about-future-air-travel.html
  5. CNBC, “Microsoft reports 17% revenue growth as cloud business accelerates,” 1/26/21, https://www.cnbc.com/2021/01/26/microsoft-msft-earnings-q2-2021.html
  6. CNBC, “Apple reports blowout quarter, booking more than $100 billion in revenue for the first time,” 1/27/21, https://www.cnbc.com/2021/01/27/apple-aapl-earnings-q1-2021.html
  7. CNBC, “Facebook earnings beat but the company warns of impact from Apple privacy changes,” 1/27/21, https://www.cnbc.com/2021/01/27/facebook-fb-earnings-q4-2020.html
  8. MarketWatch, “U.S. stocks pull back from records as investors sift through earnings,” 1/26/21, https://www.marketwatch.com/story/stock-futures-edge-higher-after-records-for-s-p-500-nasdaq-11611663429

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