Q4 earnings begin

Stock traders and investors have been waiting for this week for some time. The reason behind this much anticipated wait is because this week marks the beginning of earnings season in the U.S. Almost 43 companies in the S&P 500 will report their earnings.

The highlights of this week will be Bank of America, Netflix, Charles Schwab and Goldman Sachs today, then on Wednesday, releases will come from Procter & Gamble, UnitedHealth Group, ASML Holding, Morgan Stanley and BNY Mellon. Finally on Thursday, we’ll hear from Intel, Union Pacific and IBM.

What to Expect

In terms of actual quantitative expectations, Goldman Sachs’ David Kostin writes that consensus expects S&P 500 firms to report 4Q year/year EPS (Earnings Per Share) growth of -11% as virus restrictions hampered the growth of cyclical sectors. Excluding Energy, S&P 500 EPS is expected to fall by a more modest 8%.

Like earnings, margins are forecast to contract by 116 bps (basis points) to 9.5%, falling in 7 of 8 sectors. In contrast, consensus estimates that sales will only fall by 1% (and rise by 2% excluding Energy).

In contrast with the index-level decline, Health Care will post 2% year/year EPS growth and Info Tech earnings will grow by 1%. Overall, analysts expect cyclical sectors will report the largest earnings declines. Consensus expects EPS to contract by 102% for Energy, 40% for Industrials, and 21% for Consumer Discretionary. Materials represents a notable exception; its 6% expected EPS growth for 4Q is the largest of any S&P 500 sector.

If current consensus forecasts are realized, the year/year growth rate will have decelerated from 3Q, but this would be inconsistent with the improving trajectory of economic activity. Putting this in context, since 2003 realized S&P 500 EPS has averaged 4% greater than consensus expectations at the start of reporting season. However, in 2Q and 3Q, the aggregate S&P 500 surpassed consensus expectations by 24% and 17%, respectively.

2021 Trajectory

As investors look to 2021, (ultra loose) policy remains a key driver for corporate profits. Joe Biden laid out his economic plan last Thursday, where he proposed a fiscal stimulus package of $1.9 trillion, designed to support the economy as it emerges from the pandemic recession.

As I’ve detailed in a previous article, core components of the package include direct stimulus checks of $1,400 per person, further expansion of unemployment benefits through September, $370 billion for additional state and local government aid, and $190 billion for public health funding. Biden indicated that he would seek bipartisan support for the bill (60 votes) rather than pass it via reconciliation (50 votes).

In response, Goldman's political economists increased their fiscal assumptions and now assume Congress will enact $1.1 trillion in additional stimulus, well below what Biden has proposed. But, they expect a second proposal dealing with taxes, infrastructure, and benefit programs to pass around mid-year. That should also be over a trillion dollars.

Following the Democratic victories in the Georgia run-offs - which as a reminder as recently as two months ago was seen as bearish for markets - Goldman economists turned uber bullish, and now incorporate the likelihood of increased fiscal spending, and as a result, lifting their 2021 real US GDP growth forecast. They also raised their 2021 S&P 500 EPS growth rate by 2 pp (percentage points) to +31% ($178). But at the same time they lowered their 2022 EPS growth rate by 2 pp to 10% ($196) to reflect the positive impact of greater fiscal spending but also the headwind of higher corporate taxes.

As vaccine rollout develops, Goldman Sachs expects sectors with the highest degree of operating leverage—namely, Consumer Discretionary and Energy—to deliver some of the fastest EPS growth this year. Still, despite the cyclical rebound, Goldman expects 2021 EPS will remain below 2019 levels in three sectors: Energy, Industrials, and Financials. On the other end, Tech will continue to deliver rapid growth and represent the largest share of S&P 500 EPS given its exposure to long-term secular trends.