March 8, 2020

Earnings Roundup: Will COVID-19 Lead to Lower Earnings?

by David Aurelio.

As COVID-19 spreads should investors expect to see an impact to 20Q1 earnings expectations? S&P 500 year-over-year (Y/Y) 20Q1 earnings growth estimates have fallen to 1.6% from 5.4% on Jan. 31, 2020 and StarMine models from Refinitiv suggest that more downward revisions will follow.

Exhibit 1: S&P 500 ppts Change in Y/Y Earnings from Start of Quarter to Start of Earnings Season

Source: I/B/E/S data from Refinitiv

In a typical quarter, pervasive optimism bias in sell-side estimates tends to be self-corrected as earnings season approaches as analysts make downward revisions to estimates. Over the two months between the start of the quarter to the start of earnings season, the expected Y/Y earnings growth rate sees an average decline of 3.6 percentage points (ppts) and a median decline of 2.3 ppts. To date, the S&P 500’s Y/Y 20Q1 earnings growth rate has fallen 3.8 ppts to 1.6% since the start of the quarter and the historic declines in Exhibit 1 suggest that it is reasonable to expect that further declines will follow as it shows that analyst revisions to earnings can be drastic and happen within a tight window. However, it doesn’t provide any information as to whether estimates have already come down enough to account for the impacts of COVID-19.

Exhibit 2: S&P 500 20Q1 Earnings Predicted Surprise by Industry Group

Source: I/B/E/S data from Refintiv

Since Jan. 31, 2020, the outlook for 20Q1 earnings has fallen 3.6%. Should more downward revisions be expected or are the negative impacts already priced in? One way to look at this is by using SmartEstimates from Refinitiv. SmartEstimates place a higher weighting on top rated analysts and more recent estimates. A Predicted Surprise is created by comparing the SmartEstimate to the I/B/E/S from Refinitiv 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.

The Predicted Surprises for the S&P 500’s 20Q1 earnings shows the energy (-6.3%), consumer durables & apparel (-4.2%), consumer services (-2.5%), transportation (-2.1%), technology hardware & equipment (-2.1%), and household & personal products (-1.9%) industry groups are likely to see downward revisions. A deeper dive into this shows 20Q1 negative earnings Predicted Surprises for several bell weathers such as Exxon Mobile Corp (XOM.N) (-16.97%), Nike Inc (NKE.N) (-10.83%), FedEx Corp (FDX.N) (-22.21%), Apple Inc (AAPL.O) (-3.59%), and Procter & Gamble Co (PG.N) (-3.45%). This strongly suggests that further downward revisions to the S&P 500’s 20Q1 earnings will follow.

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