Research Blog

Earnings Season Outlook

Executive Summary

  • Third quarter earnings season is underway, and expectations have been rising.
  • Banks, airlines, and restaurants are three industries to watch.
  • The volume of earnings reports peaks later this month. Keeping abreast of the crucial announcements and data is imperative to portfolio managers and traders.

We are getting closer to the 2020 finish line. We’ll get through it! This year has been tragic for many families around the world who have suffered a loss from COVID-19. The virus re-shaped not only the corporate world, but everyone’s way of life. While we are hopeful that some normalcy returns next year, we also recognize some things have permanently shifted.

At Wall Street Horizon, we focus on corporate data for our customers. Q3 earnings season is underway with big banks kicking off the reporting period. Interest rates have been surprisingly calm since April with the benchmark US 10-year rate ranging from about 0.50% to 0.80% - volatility in the interest rate market has been very quiet given heightened equity market volatility. US consumers have been migrating from cities to the suburbs leading to a surge in new and existing home sales all while employment remains well below pre-pandemic levels. On the positive side, more home buying and IPO activity should help financials, but a weak interest rate spread is not so bullish for the space.

For the broader market, Q3 has a lot to live up to following the massive beat rate during the July-August Q2 reporting period. S&P 500 companies reported more than 30% drop in profits from the prior year, which was better than Wall Street analysts were seeking. In turn, those same analysts then revised their Q3 EPS projections upward. Mega cap technology and growth firms will account for the bulk of S&P 500 earnings, but there are more interesting trends just under the surface of the new economy.

The airlines are at the heart of the pandemic impact. The industry seeks further stimulus funds to ensure solvency through the COVID crisis. TSA checkpoint data indicates that air travel around the world (sans China, perhaps) is incredibly soft versus a year ago. The only sliver of hope is that recent high-frequency data suggests there are more fliers than during the spring and summer, but it is a far cry from normal. The airline industry’s drag on the industrials sector is seen in EPS estimates that call for a major year-on-year earnings decline.

Another industry to watch will be the big restaurant chains. Like so many facets of the economy today, there are big winners and big losers. Top finishers are generally larger firms within a given sector and those that have solid balance sheets to weather the COVID storm. Big restaurant chains are seen as taking market share from smaller, local restaurants who could not stay afloat through the stay-at-home trend.

An noteworthy theme from the Q2 reporting season was optimism among corporate managers. They generally felt the worst was behind them and that sales and net income going forward would be improving. Couple the corporate optimism with higher analyst guidance, and suddenly expectations are turning higher. Higher expectations means a greater risk of disappointment if Q3 pans out to be lackluster.

Here’s what to expect – earnings season is at its highest from October 13 to November 5. Financials dominate week one while week two features about a quarter of S&P 500 components reporting from all sectors. The week of October 26 will be the peak of reporting with some of the big tech firms showing their cards to the street. Microsoft’s earnings announcement is October 28 while Apple and Google (Alphabet) report October 29. According to today’s Wall Street Horizon data, Google backed-up its earnings date from October 26, so investors may want to keep an eye on that report.

Wall Street Horizon collects event data beyond EPS during earnings season. We parse through the noise and deliver what portfolio managers and traders need to know. October is a month of volatility in the financial markets, and having the most up-to-date, reliable, and material information is critical to profitable trading.