Q3 Earnings Preview

September comes to a close next week and with it, the third quarter of 2020. By the middle of October, firms will start releasing their Q3 earnings reports.

Here’s the S&P 500 in black with trailing operating earnings in blue. Trailing earnings are expected to trough in Q4. The two lines are scaled at a ratio of 18 to 1.

This will be another tough earnings season due to the widespread dislocations caused by Covid-19. The good news is that we’ve gradually improved from the dire numbers we saw earlier this year. For Q1, operating earnings plunged 49% from Q1 of 2019. For Q2, earnings were down 33%.

Now analysts are “only” expecting a decline of 19%. That estimate has actually increased somewhat in recent weeks. At the middle of the year, Wall Street had been expecting Q3 earnings of $30.89 per share for the S&P 500 (that’s the index-adjusted number). Now the estimate is up to $32.05 per share. (Every point in the S&P 500 is worth around $8.27 billion.)

Earnings are expected to fall another 9% for Q4. After that, earnings are expecting to snap back briskly in 2021. That’s why price/earnings ratios, based on trailing earnings, are to be so stretched. Earnings are looking backward but prices are looking forward.

For all of this year, earnings are expected to be $113.84 per share. By today’s price, that gives the S&P 500 a lofty p/e ratio of 29. However, Wall Street expects full-year 2021 earnings of $164.04 per share. That assumes earnings growth of 45% for next year. Going by that figure, that gives the S&P 500 a forward p/e ratio of 20.

Here’s the expected earnings growth for Q3:

Health Care 23.81%
Technology 9.77%
Utilities -1.19%
Consumer Staples -1.68%
Communication -9.95%
Materials -12.56%
Financials -34.55%
Consumer Discretionary -37.20%
Real Estate -50.29%
Industrials -60.10%
Energy -108.27%

Posted by on September 22nd, 2020 at 3:31 pm


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