Tag Archive: sectors

S&P 500 earnings have fully recovered, but with wide differences among sectors

The S&P 500 has reported another strong earnings season for Q4, with 79% of companies beating consensus earnings estimates for the quarter. This would be the third highest such reading in Factset’s data since 2008. The beat rate for top-line sales was similarly high at 77%. Aggregate income for the index is about 4% above year-ago levels, indicating that net income on a quarterly basis has fully recovered pre-COVID levels based on Factset’s data.

However, when we drill down into the earnings trends in the S&P 500 and its component sectors, we see the wide differentials in earnings patterns among sectors.

The charts below use quarterly index operating earnings per share as reported by S&P (S&P’s data differ slightly from Factset and other sources). The grey shaded areas are the current bottom-up consensus forecasts for the four quarters of this year.

S&P 500 Quarterly Sector EPS p1Source: Mill Street Research, S&P Dow Jones Indices

The top section of the first chart above shows us that the overall S&P 500 index is expected to see its quarterly EPS rise steadily over the next few quarters and see quarterly EPS exceed the previous peak of Q2 2019 by Q2 of this year, before reaching a new high of $47.06 by Q4 (which would be up 37% from Q4 2020).  The aggregate index figures, however, hide the variation among the 11 sectors that comprise it.

We see that Consumer Discretionary is expected to see earnings recover but not decisively exceed recent highs. Consumer Staples shows a choppy upward pattern, with Q4 expected to be slightly below Q3 of this year.

The Energy sector is expected to rebound from heavily negative earnings during 2020 to moderately positive EPS this year, but still well below the levels seen in 2018 and early 2019 (though if crude continues to rise, that could change).

Financials are expected to see earnings generally plateau around current levels, with no improvement in EPS from Q4 2020 levels, and still near levels seen in 2018-2019. Low net interest margins on lending have been a heavy headwind, partly offset by profits from stock and bond market activity and mortgage-related fees.

Health Care is expected to see a jump in earnings in Q1 of this year and then hold steady at new highs. As we will see, it is thus one of the few sectors where the consensus sees new highs in earnings occurring this year.

Turning to the second chart below with the remaining sectors, see that Industrials (as a classic cyclical sector) had a big drop in earnings in 2020 (with the Transportation component weighing heavily) but is expected to fully recover by the end of this year. Naturally, Industrials should be among the biggest beneficiaries of both fiscal stimulus and re-opening from COVID limitations.

S&P 500 Quarterly Sector EPS p2

Source: Mill Street Research, S&P Dow Jones Indices

The Technology sector, as one might guess, has been least affected by COVID and almost certainly got a boost in the second half of 2020 due to a surge in spending on IT as workers and companies scrambled to work remotely wherever possible. Consensus calls for earnings to continue growing and reach new further new highs this year.

The Materials sector is seeing a big rebound in earnings from a decline that began well before COVID hit when commodity prices and global growth were already relatively weak. Analysts expect the sector’s earnings to hit a near-term peak in Q2 of this year (matching the 2018 peak) before easing by year-end.

Communication Services has been under earnings pressure for some time, as a mix of some big Tech-related firms along with Telecom, Entertainment and Media firms. Earnings are expected to rise steadily from the current (Q4 2020) lows through the end of this year.

Earnings for the Utilities sector look to remain in a range, with no discernible growth trend visible. Demand for electricity, natural gas, and other utilities has seen little overall growth for years, and regulations in many areas keep revenues and profits relatively stable.

Finally, the Real Estate sector (principally REITs), has seen earnings hit hard by COVID, and the consensus is for only very modest recovery this year as demand for commercial real estate is likely to remain depressed.

Overall, it appears that only the Growth-oriented sectors of Technology and Health Care will see earnings reach true new all-time highs this year. Other sectors may approach or just exceed 2019 levels, while a few have further to go. While fiscal stimulus and re-opening should provide a tailwind for earnings in many sectors, those winds are not blowing at the same speed for all.

US earnings estimate revisions trends remain strong amid Q4 earnings season

While certain heavily shorted stocks are getting much of the attention lately due to retail-driven price surges, the bigger picture news is Q4 earnings reports and analyst behavior.

We track earnings estimates for a broad universe of about 2300 US stocks (market cap of $200 million and up) and construct estimate revisions indicators using two key metrics: breadth and magnitude. Breadth is the net proportion of analysts raising versus lowering estimates for a stock, which is -100% if all analysts are cutting their earnings estimates and +100% if all are raising estimates (0 indicates a balance between positive and negative revisions, or no activity at all). We look at this proportion based on revisions that occurred over the last 100 calendar days (about one quarterly reporting cycle).

Magnitude is the size of the changes, measured as the percent change in consensus mean earnings (EPS) estimates over the past month. It will thus be more sensitive but also more volatile.

The first chart below shows the average daily readings of those two indicators for all US stocks. The red line is the average revisions breadth and the blue bars are the average revisions magnitude. We can see that revisions breadth is holding at very high levels (the long-run average is actually slightly negative because analysts tend to start off with high estimates and trim them as time goes on). This means that a solid majority of stocks have more analysts raising than cutting their estimates for earnings over the next 12 months, and this has been the case consistently since July.

United States_AbsERS_Daily_20210126

The blue bars are now starting to rise again, and we can clearly see the quarterly reporting cycle in the data. The earnings season for Q2 2020 earnings that started last July provoked a big upswing in revisions magnitudes (due to a high proportion of earnings reports beating consensus estimates), and then the reports for Q3 2020 earnings three months later also provoked a similar jump in estimates.

Right now, we see what looks like a third consecutive acceleration in estimate revisions developing as Q4 2020 earnings are now being reported, and are mostly coming in better than consensus expectations. So even after months of analysts raising estimates, they are still being surprised positively by the actual earnings reports.

Where are revisions strongest? The table below shows the average revisions breadth readings for the 11 GICS sectors in the US (using the same broad universe of stocks). We see that Financials is at the top, with a very high reading of over 50%. While Financials have had strong revisions for a while now, the latest jump is likely because Financials are among the first to report earnings in a given quarter and most have reported positive surprises so far: 30 of the 34 Financials in the S&P 500 which have reported so far have beaten consensus estimates for Q4. Analysts often then respond to “earnings beats” by raising estimates for future quarters.

US Sector Abs Rev Breadth tableBeyond Financials, it is still mostly cyclical areas that have the strongest revisions activity, including Industrials, Consumer Discretionary, Technology, and Materials. And while all sectors have net positive revisions breadth, the weakest by a considerable margin are Real Estate, Utilities, and Health Care.

So the message from analysts continues to be strongly favorable for future earnings expectations, even after two consecutive quarters when earnings beat expectations substantially. The macro influences of fiscal and monetary policy on corporate earnings are now well established and likely being embedded in analyst forecasts. This is clear from the relative strength in the cyclical sector revisions indicators.

While equity markets have jumped sharply over the last three months and potentially priced in a lot of good news, the positive trend in earnings estimates from analysts that has supported equity prices thus far looks to be intact for now.

Big divergences in commodity space still favor Materials over Energy

One of the themes in our sector research for clients recently has been to focus on relative preferences within broader style or macro categories, rather than making big macro bets on Growth versus Value or Cyclical versus Defensive areas. We find that in a more range-bound market with conflicting macro trends, a more granular view is often more effective.

One stance we have held for some time has been within the Value-oriented commodity space. While in many cases historically the Energy and Materials sectors have moved together, this year has seen a dramatic divergence between the two commodity-related sectors. We have favored Materials over Energy this year, and still do, and below are some of the drivers of that view.

The first chart below shows the returns of the S&P 500 Materials sector and the S&P 500 Energy sector for this year, along with the relative performance (all indexed to 100 at the start of the chart), as of October 27th.SP500 Materials vs Energy Sector Returns

The collapse of the Energy sector this year has been historic, and comes after less extreme underperformance that was already occurring in 2019. The S&P 500 Energy sector total return index has declined -50% this year, by far the worst performing of the 11 major sectors in the S&P 500. This compares to the 6.5% gain for the S&P 500 overall.

The Materials sector, despite also being tied to global economic turbulence and commodity prices, has held up far better. Its year-to-date gain of 5.6% is only marginally behind the overall index, and vastly higher than that of Energy. And the relative outperformance trend has been consistent most of the year, both before the COVID-19 volatility in March and afterwards.

What explains the performance gap in these two commodity sectors?

First, the underlying commodities they are most closely tied to have followed very different paths this year. Crude oil prices are still far below their level at the start of the year (down about 40% for benchmark Brent crude), and even the current level of oil prices relies on the aggressive production cuts put in place by oil producers globally. So oil producers are facing the combination of lower prices and lower production, causing a severe drop in revenues. Naturally, the effects of severely depressed fuel usage due to COVID-19 travel limitations are a major factor in oil demand, and remain in place.

By contrast, industrial metals prices such as copper, aluminum, zinc, etc. (represented by the S&P/GSCI Industrial Metals index) have fully recovered their COVID-related decline and then some. Resurgent demand from China in particular as well as the strong US housing market have helped support prices for these metals used in manufacturing and housing, and are benefiting from the reflationary efforts of global central banks. Along with the increases in precious metals prices (gold and silver) this year, many of the stocks in the Materials sector have a relative tailwind to earnings from commodity prices.

Oil Industrial Metals

The effect of these divergent commodity price trends is also showing up in relative earnings estimate revisions activity. Analysts have been much more inclined to raise their earnings forecasts for Materials companies than for Energy companies, and that remains the case today. The chart below shows our aggregated relative earnings estimate revisions metrics for Materials versus Energy in the US. Readings above zero on the chart indicate more favorable analyst estimate revisions trends in Materials relative to Energy (red line indicates the relative proportion of analysts raising vs. lowering estimates, right scale; the blue bars indicate the average relative percent change in consensus estimates for the next 12 months, left scale). We can see that the readings are strongly in favor of Materials over Energy and have been for several months now.


With fundamental trends and relative returns both still pointing toward Materials over Energy within the commodity space, we would maintain relative positioning along those lines.