S&P 500 Profit Recession May End as Companies Trounce Estimates


For bulls anxious that stretched valuations in U.S. stocks could imperil the current rally, the earnings season that picks up in earnest on Friday may offer a tonic.

While profits from S&P 500 companies are projected to drop for a fourth straight quarter in the final period of 2020, the dozen companies that have already reported have trounced estimates to such an extent that the fourth-quarter tally is on track to exceed the per-share figure from the same period in 2019.

That would halt a streak of contracting profits that reached two quarters as pandemic-fueled restrictions devastated large parts of Corporate America. Big companies rushed to cut costs and cater to stay-at-home demand amid the virus outbreak, increasing online business.

A swift recovery in profits would validate bulls who have looked past surging virus cases to bet on an economic rebound amid vaccine rollout and government stimulus. Up 70% from the bear-market trough in March, the S&P 500 is trading at 23 times forecast earnings, close to the highest multiples since the dot-com era.

“Wall Street expectations are too low for Q4 2020, so we should see plenty of beats. We need them,” Nick Colas, co-founder of DataTrek Research, wrote in a note this week. With current estimates pointing to a sequential profit decline in the fourth quarter, a period that typically gets a lift from holiday spending, the bar is likely set too low, making it easier for companies to deliver outsize beats, he added.

S&P 500 Profit Recession May End as Companies Trounce Estimates

S&P 500 companies managed to exceed analysts’ estimates by an average 21% in the previous two quarters but still saw profits trail the year-earlier period. So far, those that have released results this season have topped expectations by 14%.

Should the pace of positive surprises continue, the S&P 500’s per-share profits -- which according to analyst estimates compiled by Bloomberg Intelligence fell by 8.5% to $37.13 -- would end up between $42.33 and $44.92. That would eclipse the $42.01 that companies earned in the final quarter of 2019.

Better-than-estimated results are likely to set the stage for expectations to improve for this year and next, potentially making the S&P 500 look less expensive. Right now, analysts forecast the index’s profits to jump 23% this year, followed by another 17% increase in 2022.

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