Earnings Season: Q3 Will Be As Weak As Expected

The current coronavirus crisis has its own peculiarities never seen before

Patrik Lang, CFA Head of Equity Strategy Research, Julius Baer | The US Q2 earnings season will be weak but this will hardly be a surprise and therefore should not move markets. The focus will be on corporate guidance for H2 and here we would expect some gradual improvements, which should support equity markets.

For Q2 consensus expects S&P 500 earnings to decline 43.9%, which would be the largest y/y earnings decline since Q4 2008 (-69%). Q2 profit forecasts were cut by 37% since the the beginning of Q2 which represents the largest quarterly cut since FactSet started to compile revisions in quarterly consensus forecasts in 2000. Early reporters (60% earnings beats) and macro indicators suggest that earnings will come in broadly in line with weak expectations. Against this background, the weak quarterly results should not have a major impact on the market development. However, investors will focus on corporate guidance for the second half of the year and here we would expect the newsflow to gradually improve from now on.

Earnings revisions started to stabilise last month and we expect this to continue over the coming months. For Q3 consensus expects earnings to decline by -25.4% and for Q4 by -12.8% followed by 28% earnings growth in FY 2021. Based on our macro models and historical post-recession earnings patterns, we see upside risk to consensus expectations for both H2 2020 and FY 2021. This should be supportive for equity markets, which confirms our constructive view on equities. Positive earnings revisions are by definition particularly positive for cyclicals. We leave our investment strategy unchanged and confirm our preference for cyclicals versus defensives.