After last year’s festive quarter broke a profit slump, the same is not expected this year – but it is not impossible and it could be three months late.
Quarterly earnings for the S&P 500 SPX,
they are expected to decline with fourth quarter results in the coming weeks, after declining in each of the first three quarters of 2020. Analysts predict a recovery over 2021, as well as fourth quarter figures that have exceeded their average expectations.
CFRA’s chief investment strategist, Sam Stovall, told MarketWatch that exceeding expectations for fourth-quarter figures would be in line with historical standards. Profits exceeded expectations for more than 30 consecutive quarters before the first quarter of 2020, he said, when the pandemic first affected corporate results. A general win streak this quarter would help extend a new series of strikes to three in a row.
A key question for FactSet analyst John Butters is whether profits could end up in positive territory for the quarter, even though estimates point to an aggregate decline of 6.8%. Based only on the five-year historical trend, it does not seem likely, but companies have registered much stronger beats in the past two quarters, which means that the end of the earnings recession may be a possibility. The few reports for the fourth quarter that have so far exceeded profit expectations by an average of 26.2%, Butters wrote.
What you need to know to prepare for the earnings season: expect another quarter of big earnings
The pandemic has had an uneven impact on businesses, with digital giants like Amazon.com Inc. AMZN,
and Zoom Video Communications Inc. ZM,
benefiting from an increasingly remote world, while categories such as leisure, hospitality and restaurants struggle. Cruise companies, hotels and airlines are expected to experience large negative swings in profits compared to the previous year, helping to drag the S&P 500 down.
The energy sector is expected to be the biggest loser in the fourth quarter, with analysts surveyed by FactSet showing a 101% decline.
“The causes of the decline are broad, in our opinion, in the upstream and downstream parts of the energy value chain,” wrote CFRA analysts.
West Texas Intermediate CL00,
the US crude oil benchmark saw an average price of $ 40 a barrel during the quarter, 29% lower than the previous year, analysts noted: “Getting almost 30% less for someone’s product certainly hurts, and with about two out of three barrels of oil equivalent consisting of liquids (like oil), this price drop was a major contributor. “
Only four sectors are expected to deliver positive momentum for earnings in the quarter, according to FactSet, led by materials with projected growth of 8%. In this sector, the metals and mining category, as well as industrial gases, can perform strongly, said CFRA analysts.
The other sectors with positive growth projection are basic consumer goods, health and information technology, by FactSet.
The earnings season starts for real the following week, with 40 members of the S&P 500 ready to report along with six Dow Jones Industrial Average DJIA,
components. Highlights include Netflix Inc. NFLX,
United Airlines Holdings Inc. UAL,
and Intel Corp. INTC,
Here’s what to watch for next week.
Bank on it
Look for a steady stream of bank earnings, led by Bank of America Corp. BAC,
and Goldman Sachs Group Inc. GS,
on Tuesday morning, with Morgan Stanley MS,
follows a day later. Citigroup Inc. C,
and Wells Fargo & Co. WFC,
the financial parade started on Friday, and both showed better-than-expected profits, with disappointing revenue results.
Bank shares have surpassed the S&P 500 since the end of September.
“A positive narrative has emerged: faster economic growth and expansionary fiscal policy drive the increase in net interest income (NII) and the fall in credit costs, while the resumption of share repurchases further increases profitability and EPS”, wrote UBS analyst Saul Martinez in a note to clients, although he is proceeding with a little more caution in the sector. Among Martinez’s concerns is that “mortgage income should fall to the ground from the high levels of 2020”.
Press play
Netflix had a hot first half of 2020, but struggled to live up to that momentum in the third quarter. The company will try to get back on track when it releases its fourth quarter results, which will show how popular shows like “The Queen’s Gambit” and a new season of “The Crown” impacted subscriber trends.
Full view: Netflix can fight for a successful streak for the initial subscriber pandemic
Another important area to be monitored is the impact of price increases on turnover levels. The company raised prices in the US and Canada during the fourth quarter and “there is growing evidence that we will see widespread price increases in 2021,” according to Bernstein analyst Todd Juenger.
Netflix reports the results on Tuesday afternoon.
End of an era
Intel is moving in a new direction after recently using VMware Inc. VMW,
Chief Executive Pat Gelsinger will assume his primary role from mid-February. But investors will hear one last time from the old guard when the chip giant holds its Thursday afternoon earnings conference call.
To learn more: Can Intel’s ‘wonder boy’ attract Steve Jobs?
While the call may not shed light on Intel’s new vision, the company noted in a press release announcing Gelsinger’s appointment that it has made “great progress in its 7 nanometer process technology and plans to provide an update” in conjunction with the profits. Intel also revealed that it expects its fourth quarter earnings and revenues to exceed the company’s previous forecasts.
Intel has struggled in recent years against a series of technological errors and is trying to get back on track in 2021.
Slow ascent
Domestic travel increased in the fourth quarter, especially around the holiday, but United Airlines and the rest of the civil aviation industry still face many problems ahead. Helane Becker, an analyst at Cowen & Co., predicts that first quarter revenue for the industry could fall 45% from levels seen in the first quarter of 2019, due to low tariffs and slower-than-expected vaccine launches. United will offer its perspective on the situation with its Wednesday afternoon report and Thursday morning results conference call.
A slice of Dow
Six components of the Dow Jones Industrial Average are on the agenda, starting with Goldman Sachs on Tuesday morning and then Procter & Gamble Co. PG,
and UnitedHealth Group Inc. UNH,
on Wednesday morning. Travelers Cos. Inc. TRV,
Thursday morning slate begins, while Intel and International Business Machines Corp. IBM,
finish the day after the closing bell.
IBM could share more about an ongoing sales reorganization at the company, while trying to simplify the customer experience. “This change will allow IBM to penetrate deeper into its customer base and increase its share of the portfolio,” wrote Evercore ISI analyst Amit Daryanani in a recent note to customers.