US Reporting Season: what to expect from this quarter’s results

When is US reporting Season?

US Reporting Season has begun, and will continue until the middle of November.

The market data that matters:

What is the market expecting out of this earnings season?

The effects of the COVID-19 recession is tipped to plague this US reporting season. As the US economy slowly moves out of lockdown and recession, the market is positioned for another deep contraction in earnings growth across the S&P 500 for the quarter. Data gathered from Fact Set suggests EPS growth ought to contract by approximately 21 per cent for the third quarter, backing up the 31.6% per cent decline recorded in the second quarter.

What are the key themes to watch out of earnings season?

1. What guidance will corporates deliver?

Once again, the bar for US earnings is set low for US corporates to exceed. It’s expected to be an objectively poor reporting period for S&P 500 companies, with the focus of market participants instead to be directed towards what firms say about future profits. A considerable 184 companies avoided providing guidance to the market last reporting season. Market participants will be hoping for far greater clarity and confidence about the outlook for earnings from management teams this quarter.

2. Is the market entering an upgrade cycle?

Recently the analyst community has moved towards revising higher the outlook for US corporate profits. According to financial data company FactSet, the market has upgraded earnings growth forecasts for the third quarter by 4 per cent since the beginning of the quarter. The results for upcoming quarters have yet to be markedly revised higher, however. Year-over-year EPS growth at this stage is still being tipped to remain negative until the first quarter of 2021.

3. Which sectors will lead and lag?

The leaders and laggards are expected to be similar to those of recent quarters. The restrictions on economic activity and global travel is tipped to manifest in another significant drop in energy sector profits, while the lockdown-sensitive industrials sector and consumer discretionary sector is expected to show a 62 and 34 per cent drop in EPS, respectively. All sectors are forecast to show declines in earnings growth, with the IT sector expected to top the market with a -1.5 per cent contraction in earnings.

4. What are the risks to the recovery?

As the outlook for the US economy and corporate earnings remains uncertain, the market will be tuning-in to what company management says about the fundamental risks to the outlook. The virus will remain the major concern, especially as it pertains to expectations of a vaccine and a return to normal for the US and global economy. US politics and fiscal policy will also garner attention. While geopolitical concerns like the trade-war and Brexit will remain themes to watch.

How could this earnings season impact the financial markets?

The S&P500 remains in a volatile environment. The VIX remains historically elevated, with price-action heavily driven by speculation surrounding the US Elections, along with the prospect of further US fiscal stimulus. As a result, this earnings season has diminished in significance compared to prior reporting periods. Nevertheless, the quarter’s results will prove a major factor in how the S&P500 trades into the year’s end, as the index builds momentum to challenge fresh record highs