Summary List Placement
After a dismal drop in the second quarter, market participants can expect third-quarter earnings results — and any sign of profit recovery — to be under the microscope.
“Earnings season kicks off next week and will provide investors with another look at the impact of COVID-19 on S&P 500 fundamentals,” said David Kostin, the chief US equity strategist at Goldman Sachs. “During the quarter, the Goldman Sachs equity analyst US re-opening scale averaged between 4 and 5 on a continuum between 1 (lockdown) and 10 (fully re-opened).”
According to Goldman’s analysts, the US economy is chugging along at about 50% capacity. As one would expect, that’s going to have a big impact on earnings.
“The consequences of the semi-frozen economy on an uneven road to recovery will be visible in 3Q results,” Kostin said. “Consensus expects 3Q S&P 500 EPS will decline by 21% on a year/year basis, following a 32% drop in 2Q and a 15% fall in 1Q.
He continued: “Including the anticipated 14% fall in 4Q, our full-year 2020 EPS estimate of $130 reflects a 21% year/year decline from the 2019 level.”
Kostin’s mention of an “uneven road to recovery” is worth noting. Although some companies are barely scraping by during the pandemic, others are growing sales and margins at a rapid clip. It’s an anomaly that hasn’t gone unnoticed.
Over the long term, it’s clear that sales growth and margin expansion are responsible for the lion’s share of stock performance.
Take a look at the study below from Boston Consulting Group and Morgan Stanley. Over a 10-year time span, sales and margin growth are primarily accountable for a stock’s behavior.
It’s an idea that Fred Liu, the founder and portfolio manager of Hayden Capital, refuses to neglect. In fact, with these two metrics at the forefront of his analysis, Liu was able to purchase two stocks — Amazon (AMZN) and Sea Limited (SE) — early enough that they ended up increasing tenfold under his watch. For context, throughout the first two quarters of 2020, Liu’s fund is up over 101% despite the challenging macroeconomic backdrop.
Still, although the entirety of 2020 looks like a lost year from an earnings standpoint, Kostin is projecting a firm snap-back in the years to come.
“Looking forward, we project a strong 30% earnings rebound to our baseline 2021 EPS forecast of $170, followed by 11% …read more
Source:: Business Insider