With Q2 earnings season over (98% of S&P 500 companies have reported), we can assess how much upside there might be in 2H 2020 operating results and what Wall Street analysts see for US stock performance over the next 12 months. (Data source: FactSet Earnings Insight, link below.)
First, the final Q2 highlights:
- 84% of companies beat analysts’ earnings expectations. That’s a record back to when FactSet started collecting the data in 2008. The prior record was Q2 2018’s 81%.
- Of the major sectors, Technology and Health Care had the largest beat percentages, at 94% and 92% respectively. Energy was the worst, at 65%.
- The amount by which S&P 500 companies beat estimates, 23.1%, is also a record. The prior record was 14.7% in Q1 2010 (i.e. coming out of the Great Recession).
- Q2 earnings were down 31.8% from the same quarter in 2019, but this was not as bad as Q1 2009’s -35.4% decline (the bookend for the prior point).
- That Q2 2020 wasn’t as bad as Q1 2009 comes down to less-bad revenue declines. Q2 2020’s top line comparison was -8.7%; Q1 2009’s was -11.5%.
Takeaway: Q2 2020 didn’t end up as bad as the worst quarter of the Great Recession because the fiscal and monetary policy this time around was both faster and larger than back in 2009.
Now, a graphical look at how much Wall Street analysts have upped their 2H 2020 and 2021 earnings estimates in light of how well Q2 went versus their expectations:
Takeaway: even with Q2’s record level of earnings outperformance relative to expectations, Wall Street analysts have barely touched their Q3/Q4 2020 estimates. Q2 ended up being $5.25/share better than what they were looking for on July 10th (just as earnings season started). Yet the Street’s estimate for all of 2020 is just $5.32/share higher than then; you can see the trough in the 2020 line above (the bottom one). Essentially, the Street has added just $0.07/share for 2H 2020 even though they were much too pessimistic about Q2.
Finally, a summary of analysts’ implied S&P 500 12-month price targets:
- If every S&P stock hit the average price target of the analysts that follow it, the index would basically be at 3,700 (FactSet’s exact number: 3,698.51). That is 5.4% above Friday’s close.
- You might think “that’s not a lot of upside”, but keep in mind that at the start of Q2 earnings season on July 10th the Street’s aggregate price target was 3,352. That represented 5.2% upside, but in the 7 weeks since then the index is up 10.1%.
Pulling these 3 points together: as unfashionable as it may be to defend the S&P 500’s current record levels using fundamental analysis, the cyclical analyst in us says there is a case to be made. Second quarter earnings results were far better than expected, and companies are/will be adjusting their cost structures to improve their profit picture further over the next 4 quarters. Wall Street analysts are playing it safe, as they always do, neither taking their 2H 2020 or 2021 numbers higher just yet.
Bottom line: US equities will keep rallying as long as investors believe the Street is behind the curve, both in raising their 2020/2021 earnings estimates and price targets. As much as the COVID Crisis is “different”, in this one respect it is the same as every other cycle we’ve covered back to 1990.