After the holiday quarter broke an income recession last year, the same isn’t expected this year – but it’s not impossible and could happen three months late.
Quarterly profit for the S&P 500 SPX,
are expected to decline as fourth-quarter results roll in in the coming weeks, following a decline in each of the first three quarters of 2020. However, analysts are predicting a rebound in 2021, as well as fourth-quarter numbers that exceed their average expectations.
CFRA Chief Investment Strategist Sam Stovall told MarketWatch that exceeding expectations for the fourth quarter numbers would be in line with historical patterns. Earnings exceeded expectations for more than 30 consecutive quarters before the first quarter of 2020, he said, when the pandemic first took its toll on corporate earnings. If total earnings beat this quarter, another set of beats could expand to three in a row.
A key question for FactSet analyst John Butters is whether earnings can eventually end in positive territory for the quarter, even though estimates call for an overall decline of 6.8%. Based solely on the five-year historical trend, it doesn’t seem likely, but companies posted much stronger beats over the past two quarters, meaning an end to the earnings recession could be a possibility. The few fourth-quarter reports that have come in so far exceeded earnings expectations by about 26.2% on average, Butters wrote.
What to Know to Prepare for Earnings Season: Expect another quarter of big profit beats
The pandemic has had an uneven impact on businesses, with digital giants such as Amazon.com Inc. AMZN,
and Zoom Video Communications Inc. ZM,
take advantage of an increasingly remote world, while categories such as leisure, hospitality and restaurants are struggling. Cruise lines, hotels and airlines are expected to see massive negative swings in earnings compared to a year earlier, which will help bring the S&P 500 down.
The energy sector is expected to be the biggest loser for the fourth quarter, with analysts polled by FactSet modeled a 101% decline.
“The causes of the decline are, in our opinion, broad, both upstream and downstream in the energy value chain,” wrote CFRA analysts.
West Texas Intermediate CL00,
the US crude oil benchmark saw an average price of $ 40 a barrel during the quarter, 29% lower than a year earlier, the analysts noted: “Getting nearly 30% less for a product certainly hurts, and with about two out of every three barrels of oil equivalent of liquids (such as crude oil) contributed greatly to that price drop. “
According to FactSet, only four sectors are expected to deliver positive earnings momentum in the quarter, led by materials with an expected growth of 8%. Within that sector, the metals and mining category, as well as industrial gases, could perform strongly, the CFRA analysts said.
The other sectors expected to show positive growth include consumer staples, healthcare and information technology, according to FactSet.
Earnings season kicks off in earnest over the next week, with 40 members of the S&P 500 reporting, along with six Dow Jones Industrial Average DJIA,
components. Highlights include Netflix Inc. NFLX,
United Airlines Holdings Inc. UAL,
and Intel Corp. INTC,
This is what you should pay attention to for the next week.
Bank on it
Look for a steady stream of banking revenues led by Bank of America Corp. BAC,
and Goldman Sachs Group Inc. GS,
on Tuesday morning, with Morgan Stanley MS,
will follow a day later. Citigroup Inc. C,
and Wells Fargo & Co. WFC,
kicked off the financial parade on Friday and both showed better than expected earnings with disappointing earnings.
Bank stocks have outperformed the S&P 500 since late September.
“A positive story has emerged: faster economic growth and expansionary fiscal policies are driving rising net interest income (NII) and falling cost of credit, while the resumption of share buybacks further increases profitability and earnings per share”, wrote UBS analyst Saul Martinez in a note to clients. although he is more cautious in the sector. One of Martinez’s concerns is that “mortgage income should be sober from the high levels in 2020”.
Press play
Netflix had a red-hot first half of 2020, but struggled to live up to that momentum in the third quarter. The company will try to get back on track when it releases its fourth quarter results, showing how popular shows such as “The Queen’s Gambit” and a new season of “The Crown” influenced subscriber trends.
Full preview: Netflix may be struggling to make a successful sequel to the early subscriber pandemic
Another important point of attention is the impact of price increases on turnover. The company raised prices in the US and Canada during the fourth quarter and “evidence is growing that we will see widespread price increases in 2021,” said Bernstein analyst Todd Juenger.
Netflix reports results on Tuesday afternoon.
End of an era
Intel is heading in a new direction after recently hitting VMware Inc. VMW has tapped,
Chief Executive Pat Gelsinger will take over his top role from mid-February. But investors will hear one last time from the old guard when the chip giant holds its earnings call on Thursday afternoon.
For More: Could Intel’s ‘Boy Wonder’ Pull a Steve Jobs?
While the call does not shed light on Intel’s new vision, the company noted in a press release announcing Gelsinger’s appointment that it “has made strong progress in its 7-nanometer process technology and plans to build a update “in conjunction with the revenue. Intel also announced that it expected fourth-quarter revenues and earnings to exceed the company’s previous expectations.
Intel has struggled with a series of technology missteps in recent years and is looking to get back on track in 2021.
Slow ascent
Domestic travel picked up in the fourth quarter, especially around the holidays, but United Airlines and the rest of the airline industry are still in a lot of pain. Cowen & Co. analyst Helane Becker predicts first-quarter sales for industry could be 45% lower than the first quarter of 2019, given low rates and a slower-than-expected vaccine rollout. United will provide its perspective on the situation with its Wednesday afternoon report and Thursday morning on the earnings call.
A piece of the Dow
Six Dow Jones Industrial Average components are on the roll, starting with Goldman Sachs on Tuesday morning and then Procter & Gamble Co. PG,
and UnitedHealth Group Inc. UNH,
on Wednesday morning. Travelers Cos. Inc. TRV,
kicks off Thursday morning, while Intel and International Business Machines Corp. IBM,
round off the day after the closing bell.
IBM could share more about a sales reorganization underway at the company as it tries to simplify the customer experience. “This move will inherently enable IBM to penetrate deeper into their customer base and increase their portfolio share,” Evercore ISI analyst Amit Daryanani wrote in a recent note to clients.