STOCKS UNDETERRED BY Q2 EARNINGS CONTRACTION
Entering May, we suspected that an abysmal second quarter would largely be a “throw away” one in the eyes of investors, and with second quarter S&P 500 earnings almost finished, it is increasingly clear that the markets are far more concerned with the shape of the economic recovery as we head into 2021. Almost 90% of companies in the S&P 500 have reported Q2 results, and earnings growth is on pace to contract by over -33%, the worst year-over-year decline since Q1 2009 (-35.4%). However, similar to last week when Q2 GDP came in at a stunning -32.9% – the worst reading in US history – stocks have been undeterred and finished the week roughly 2% higher.
Why Might Investors be Dismissing Terrible Earnings?
Beyond the flood of fiscal and monetary support that has underpinned this historic rally off the March lows, investors have mostly treated the sharp economic decline in the second quarter as the trough of this recession and thus, a transitory event. In addition, entering this earnings season, expectations were about as dire as possible, with the average analyst predicting a whopping -44.1% Q2 earnings contraction (per FactSet). As a result, 83% of S&P 500 companies that have reported have beaten earnings expectations, which would be the highest “beat rate” since FactSet began tracking the data in 2008. In the second half of 2020, investors will likely be more discerning, but current expectations for Q3 earnings are only about -22%, so while investors will need to see improvements relative to Q2, the bar remains very low.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO