Stocks are Holding Up – Half Way through the Earnings Season

As of Monday, May 4, we are over halfway through the first quarter earnings season. Of the 500 stocks in the S&P 500, 283 companies had reported results for the quarter. Big banks got the earnings season started back on April 14 and we have seen some big swings in individual stocks, but the overall market has been far calmer than I expected it to be.

If we look at a performance chart that compares the overall market with the 10 main sector ETFs, we can see that with the exception of a huge swing from the energy sector, the performances as a whole have been pretty steady. The S&P is up 2.87% from the start of earnings season through the close on May 4. The Energy Select Sector SPDR (XLE) was down as much as 9.2% early on and it was up as much as 14.97% at its high. This swing is more the result of oil prices more so than earnings results.

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Other than the energy sector, most of the other sectors have been rather orderly with their ups and downs. The communication services sector is the second leading performer over this stretch with a gain of 6.93%. With companies like Facebook, Alphabet, and Netflix among the top holdings, it isn’t surprising to see the XLC among the leaders. These stocks have held up well and the companies have issued solid earnings reports—maybe even benefitting from the stay-at-home economy. Consumer discretionary and tech stocks have performed well during this stretch as well and both of those sectors are up over 5%.

As for the worst performing sectors during this time period, the utilities sector is the worst performer with a decline of 4.41%. The financial sector has fallen 2.97% since April 13 and that is the second worst performance.

If we look at the earnings results thus far, 67% of the companies in the S&P 500 have beaten earnings estimates and 62% have beaten revenue estimates. Historically, 65% of companies beat earnings estimates and 60% beat revenue estimates. Over the previous four quarters, 74% beat on the earnings side and 59% beat on the revenue side.

What this tells us is that the earnings results have been in line with estimates and the historical averages, at least for the most part. The table below is from Refinitiv and it breaks down each sector.

Looking at specific sectors, the materials sector has seen 92% of the companies beat EPS estimates and that is the highest percentage of the bunch. The consumer staples sector has the second highest percentage of companies beating on the earnings side at 83%.

What I found to be very interesting is that the communication services sector has one of the lowest percentages of companies beating estimates at 50%, yet it is one of the top performing sectors in terms of percentage gain. Conversely, the financial sector is also on the low side in terms of companies beating EPS estimates and it is among the worst performing sectors.

Looking at the revenue side, the healthcare sector has seen the highest percentage of companies beating estimates at 83%. The tech sector has the second highest percentage at 82%. The energy sector has the lowest percentage of stocks beating revenue estimates at 47%. Communication services companies are the second lowest at 50%.

I find it very interesting that the communication services sector is one of the worst sectors in terms of lowest percentage of companies beating earnings and one of the lowest percentages of companies beating revenue estimates. And yet it is the second best performing sector in terms of price gain.

One of the other parts of the report from Refinitiv that I found to be interesting was the table below. It shows the projected growth rates for S&P 500 companies in terms of revenue, net income, and earnings.

We see how the projected growth rates dropped sharply for 20Q1, but the projections for Q2 are really bad with earnings expected to drop 39.1% while net income is expected to drop 38.3%. The chart shows a slow recovery, but growth doesn’t return until the first quarter of 2021 when the numbers will be compared to the low numbers of 2020.

The only sector that is expected to see earnings grow over the next two quarters is the utilities sector and the only two sectors that are expected to see revenue growth in the next two quarters are utilities and healthcare.

This is not a recipe for a strong stock market, but somehow the market keeps holding its ground after rebounding from the March low.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.