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Earnings Outlook a Source of Support for the Market

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The pandemic was a big blow to corporate profitability, resulting in significant earnings declines in the first three quarters of 2020. We are currently going through the reporting cycle for 2020 Q4, with companies not only beating consensus EPS and revenue estimates at record levels, but also providing favorable guidance for the coming periods.

The earnings growth picture was all along expected to turn positive from the 2021 Q1 period, but the earnings growth rate is actually improving since analysts are raising their estimates. We are seeing this in rising estimates for 2021 Q1 and full-year 2021.

Driving this positive revisions trend is favorable guidance and management commentary as companies report Q4 results and discuss trends in their industries. We saw this at first with JPMorgan (JPM) and other major banks who ended up releasing some of their loan-loss reserves as they didn’t see the need to add to their reserves for the coming periods. We are seeing similar developments from bellwethers in other industries like 3M (MMM - Free Report) , Johnson & Johnson (JNJ - Free Report) and even General Electric (GE - Free Report) and others.

In terms of the Q4 scorecard, we now have results from 84 S&P 500 members or 16.8% of the index’s total membership. Total earnings for these 84 companies are down -0.8% from the same period last year on -0.2% lower revenues, with 84.5% beating EPS estimates and 78.6% beating revenue estimates.

The proportion of these 84 index members beating EPS and revenue estimates is the highest we have seen in recent years. Even the growth rate for these index members is tracking better relative to what we saw in the first three quarters of 2020.

Looking at Q4 as a whole, combining the actual results that have come out with estimates for the still-to-come companies, total earnings for the S&P 500 index are expected to be down -5% on +0.7% higher revenues. We feel that if the ongoing trend of strong EPS surprises continues through the remainder of this earnings season, the Q4 earnings growth could actually turn positive.

For a detailed look at the overall earnings picture, please check out our weekly Earnings Trends report: Early Q4 Results Show an Improving Earnings Picture

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