05/12/2020
Through Friday, approximately 86% of S&P 500® Index Q1 2020 profit reports were complete. As of the end of last week, the blended earnings per share (EPS) growth rate has declined 13.6% year-over-year on sales growth of +0.6%. With earnings reports substantially slowing down this week, and the majority of corporate first quarter results in the rearview mirror, we thought we would provide a look at how the market responded to the steepest year-over-year decline in profits since Q3 2009 — where EPS dropped 15.7%, per FactSet1.
 
The first two charts below show that for S&P 500 companies, as well as U.S. companies as a whole, investors generally gave companies a pass on missing analysts' Q1 EPS expectations. Although companies who beat expectations saw their stocks perform mostly in line with the various measured averages below, investors avoided severely punishing companies who did not deliver in Q1. Given the uncertainty and unprecedented nature of COVID-19 impacts, we believe investors looked at many companies that missed EPS estimates and decided the results highlighted a temporary anomaly. And although profit trends are very likely to be worse in Q2, earnings could improve through year-end.




At a sector level, and highlighted in the chart below, companies within Communication Services, Consumer Discretionary, Technology, and Energy saw their stocks gain more than 1.0% on average during their earnings reporting day. What stands out to us, however, is that the market has given many companies a pass in sectors where overall year-over-year profit declines have been most severe and expected to trend poorly over the coming quarters. 



As the two earnings FactSet charts below highlight, consumer discretionary has seen Q1 2020 EPS plummet by over 50% year-over-year, and financials EPS fall over 43%. Yet, companies in both sectors saw generally positive market reactions to their earnings reports this season. With that said, we would say most of the positive momentum in the market over recent weeks has been built upon growing optimism more of America is starting to reopen for business. From a performance standpoint, this shift in sentiment has favored sectors like technology, energy, and other cyclical areas, where past, and even present results are believed to be less indicative of the future. Only time will tell if the market's view is correct.



Important Disclosures:

1Factset, S&P 500 EARNINGS SEASON UPDATE, By John Butters | May 8, 2020

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Past performance is not a guarantee of future results. 

P/E Ratio (EPS) means the company’s current price (P) divided by earnings (E). 

Blended P/E ratio means a weighted average of the most recent actual reported earnings plus the closest quarterly forecast earnings.

The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The S&P 500 Health Care Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) health care sector. 

The S&P 500 Consumer Discretionary Select Sector Index measures the performance of consumer discretionary stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Consumer Staples Select Sector Index measures the performance of consumer staples stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector. 

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Real Estate Index comprises stocks included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS)® real estate sector. 

The S&P 500 Financial Select Sector Index measures the performance of financial stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Information Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) information technology sector. 

The S&P 500 Utilities Select Sector Index measures the performance of utility stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

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