by Tajinder Dhillon.
With 75% of companies reporting earnings for Q2 2020, we provide an update to the STOXX 600 Q2 2020 Earnings Preview posted last month.
In the preview, it was noted that Q2 earnings growth was expected to be -53.9%, which is the worst quarter since inception of this report. We also found that analysts started to make aggressive downward revisions to Q2 earnings estimates in mid-March and continued to do so until early May.
It appears that the aggressive downgrades laid the foundation for companies to beat consensus expectations more easily. When looking at the Earnings Season App in Refinitiv Eikon, this can be confirmed by looking at Exhibit 1.
The Earnings Season App allows users to monitor the current earnings season as it unfolds, detailing developing trends of companies that have already reported and how they may impact companies that have yet to report. Analytics are displayed at the aggregate and company level to support idea generation. To access the app, type “EARN” in Refinitiv Eikon.
Approximately 60% of constituents have beat earnings expectations this quarter, which is well above the prior four-quarter average of 49%. Similarly, only 33% of constituents have missed earnings expectations this quarter, compared to a prior four-quarter average of 43%.
Exhibit 1: STOXX 600 Beat/Match/Miss Rates
Basic Materials, Technology, and Industrials all posted strong beat rates in excess of 70% this quarter which is well above its respective prior four-quarter average. Utilities (40% beat) and Energy (37% beat) struggled to beat consensus expectations, as they are the only two sectors with beat rates below its prior four-quarter average.
Interestingly, it appears as if the market is not rewarding companies that beat expectations as shown by the Price Reaction – 2D column which shows how prices have moved post-reporting. On aggregate, companies that beat expectations saw share prices remain flat, but on a sector basis, Technology stocks saw an aggregate price increase of 2.6%. Health Care companies appeared to see share prices fall on average regardless of beating, meeting, or missing earnings expectations.
Continuing with the app, we can also look at the Current Quarter Surprise as shown in Exhibit 2. Within this section, the Reported Actual highlights how much companies beat or missed expectations on aggregate by comparing the reported actual vs. consensus estimate.
Exhibit 2: STOXX 600 Surprise Factors
Industrials and Basic Materials once again lead all sectors and have posted the strongest earnings surprise at 689.7% and 44.5% respectively. The app allows users to click into any of the data points which will display company level data allowing for granular analysis.
As an example, we can click into the 689.7% and it will display a ‘Show Work’ page which highlights the company level data. Exhibit 3 displays the individual companies that contributed most to the positive surprise factor which includes Abb LTD (ABBN.S), Siemens AG (SIEGn.DE), and Swedish companies Volvo (VOLVb.ST) and Skanska AB (SKAb.ST). Note that this page is showing aggregated earnings as opposed to per-share earnings data.
Exhibit 3: STOXX 600 Industrials Surprise Factor
If we look more broadly, we can see the companies that are most positively contributing to the overall STOXX 600 surprise factor of 39.9% as shown in Exhibit 4. Intesa Sanpaolo, Banco Santander, BNP Paribas and Credit Suisse are a few of the banks to have posted a large positive Predicted Surprise. Automakers including Fiat Chrysler and Daimler AG also beat expectations while oil majors Royal Dutch Shell and Total posted a positive predicted surprise of 131.3% and 125.1% respectively.
Exhibit 4: STOXX 600 Surprise Factor
The Yet to Report Predicted Surprise column shows users the anticipated Predicted Surprise of companies that have not yet reported earnings. Aside from a large negative Predicted Surprise for Basic Materials which is being driven by Thyssenkrupp AG (SmartEstimate: €-1.57 vs. Consensus: – €1.21 equating to a Predicted Surprise of -29.84%), the remaining sectors look to post earnings that are broadly in-line with analyst expectations on an aggregate basis.
Finally, we look at earnings growth and analyst revisions as shown in Exhibit 5. The Q2 2020 STOXX 600 earnings growth rate is -57.4%, which is in-line with earnings expectations at the beginning of earnings season. Although companies are beating current quarter earnings expectations (i.e. positive Predicted Surprise), they are still able to post a large negative year-over-year growth due to the impact of COVID-19.
The Next Quarter Revisions looks at how estimates have changed pre and post-company reporting over a 30-day time period. While Industrials have posted a strong earnings beat this quarter, it appears that analysts continue to remain bearish on this sector, as they have downgraded next quarter estimates by -7.0% for those companies who have reported Q2 earnings and -14.0% for companies yet-to-report Q2 earnings.
For energy companies that have reported Q2 earnings, the next quarter (i.e. Q3) estimates have increased on an aggregate basis by 51.8%. Looking further, analysts have raised Q3 estimates for oil majors BP, Total, and Royal Dutch Shell, indicating that the bottom may have occurred for this sector as oil prices have stabilized.
Exhibit 5: STOXX 600 Earnings Growth
To wrap up, we can see the power of the Earnings Season App by showing a real-time view of earnings season for any list, portfolio, or index. It can also be customized to display additional columns of information from the Refinitiv data library including StarMine quant model or ESG Scores.