March 31, 2020

Are We Heading into an Earnings Recession?

by David Aurelio.

On March 8, we published “Earnings Roundup: Will COVID-19 Lead to Lower Earnings?” Based on an updated review of analyst revisions data, it now seems clear that we are. The S&P 500 is expected to enter an earnings recession, which is defined as two consecutive quarters of year-over-year (Y/Y) earnings declines, starting in 20Q1. Analysts also anticipate that full year 2020 earnings will fall 2.0%. This outlook is meaningfully different from the pre-COVID-19 and crude oil price war view at the end of January. With earnings season quickly approaching, the question now is, should investors expect further downward earnings revisions?

Exhibit 1: S&P 500 Y/Y Earnings Expectations

The first Italian case of COVID-19 was confirmed on Jan. 31. Since then, Y/Y earnings expectations for 2020 have declined 11.2 percentage points (ppts) to -2.0% from 9.2%. An oil price war between Saudi Arabia and Russia, which broke out on Mar. 8, led ICE Europe Brent Crude Electronic Energy Futures (LCOc1) to fall more than 50%, reaching $21.65 on March 30 from the $45.27 close on March 6, added further strain to earnings projections. This sparked an acceleration in downward revisions to the S&P 500’s 2020 quarterly and fully year earnings estimates. As a result, analysts anticipate the index will enter an earnings recession in 20Q1 that lasts through 20Q3 and full year earnings for 2020 to be 2.0% lower than the prior year.

Exhibits 2 through 6 highlight the industry groups that analysts expect to see the greatest impacts from COVID-19 and the oil price war. Since Jan. 31, the energy, transportation, automobiles & components, consumer services, and consumer durables & apparel industry groups have seen the largest downward revisions to earnings estimates and 20Q1 earnings expectations have fallen 8.7%.

Exhibit 2: S&P 500 Changes to 2020 Earnings Estimates Jan. 31 to March 31

 Exhibit 3: S&P 500 Changes to 20Q1 Earnings Estimates’s Jan. 31 to March 31

Exhibit 4: S&P 500 Changes to 20Q2 Earnings Estimates Jan. 31 to March 31


Exhibit 5: S&P 500 Changes to 20Q3 Earnings Estimates Jan. 31 to March 31


Exhibit 6: S&P 500 Changes to 20Q4 Earnings Estimates Jan. 31 to March 31

Given the magnitude of the downward earnings revisions to earnings that have already taken place, can investors expect current estimates to remain stable going into earnings season, or should they expect more revisions to follow?

One way to look at this is by using StarMine SmartEstimates® from Refinitiv. SmartEstimates® places a higher weighting on top-rated analysts and more-recent estimates. A StarMine Predicted Surprise is created by comparing the SmartEstimate® to the I/B/E/S from Refinitiv mean estimate. The Predicted Surprise % is the percentage difference between the SmartEstimate® and I/B/E/S mean estimate. When the Predicted Surprise is significant, it accurately predicts the direction of future revisions, or a beat/miss for companies that are reporting, 70% of the time.

Exhibit 7: S&P 500 Earnings Season Report App within Eikon from Refinitiv – 20Q1 Preferred Earnings

The Earnings Season Report App within Eikon from Refinitiv offers the ability to look at the aggregated Predicted Surprise % for the companies yet to report, which is shown in “Column A” of Exhibit 7. As a rule of thumb, a Predicted Surprise % of +/- 2% is meaningful. Therefore, based on the Current Quarter Surprise Yet to Report Predicted Surprise % of -3.8%, investors should anticipate further downward revisions to S&P 500 20Q1 earnings as earnings season approaches.

Earnings season is about more than just the current quarter’s results, corporate guidance and analyst revisions to estimates for the upcoming quarter are critically important as well. Predicted Surprise % and the Earnings Season Report app can be used to gauge how analysts will revise estimates for the upcoming quarter. Adding a column to the Earnings Season Report App, “Column B” of Exhibit 7, demonstrates how it is possible to see the preferred earnings Predicted Surprise % for the next calendar quarter. The Predicted Surprise % of -9.6% indicates that investors should expect further downward revisions to the S&P 500’s 20Q2 earnings. Repeating this for CQ3 and CQ4 results in Predicted Surprises of -6.7% and -4.7%, respectively.

Exhibit 8: S&P 500 Earnings Season Report App within Eikon from Refinitiv – Show Work

A deep dive analysis can be performed by clicking into the Earnings Season Report values. For example, clicking into the energy sector’s preferred earnings Predicted Surprise % for CQ2 of -184.2% (shown in “Column B” of Exhibit 7), will bring up the “Show Work” window shown in Exhibit 8. The constituent level detail is now available to analyze. Further analysis can be performed by clicking into the constituent’s identifier, such as Chevron Corp’s CVX.N, which will bring up the constituent’s overview page.

To review a constituent’s earnings per share estimate details, go to the “Estimates” tab and select “Detailed Estimates”. Once on the “Detailed Estimates” page, set the measure to “Earnings Per Share” and the period to the period of interest (i.e. Q2 Jun-20 for this example).

Exhibit 9: Chevron Corp (CVX.N) Q2 June 2020 EPS Detailed Estimates Page within Eikon

Exhibit 9 shows Chevron’s detailed EPS estimates for the quarter ending in June 2020. The historical graph highlights that SmartEstimate has led the mean estimate and the current Predicted Surprise % of -338.02%, which is based on a SmartEstimate of -$0.41 per share and a mean estimate of -$0.07 per share, indicates that further downward revisions are likely to follow.

As earnings season for the first quarter of 2020 approaches and analysts anticipate an earnings recession, investors are looking to see if further declines in earnings estimates are on the horizon. While analysts have considerably cut earnings estimates for 2020 since Jan. 31, the Predicted Surprise model from Refinitiv indicates that investors should expect to see further downward revisions to earnings estimates for all four of the S&P 500’s 2020 quarters.

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