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Wall Street analysts knew first-quarter earnings would be bad this year because of the COVID-19 pandemic, but they’ve been even worse than expected as companies are beating forecasts by the lowest rate in at least 10 years.
Companies and analysts typically play a game of lowering earnings expectations to make them more beatable. Over the past five years, earnings estimates for S&P 500 /zigman2/quotes/210599714/realtime SPX -0.63% index companies have declined by an average 2.6% during the first two months of a quarter. That’s allowed 73% of companies to beat those lowered estimates, according to John Butters, senior earnings analyst at FactSet.
Estimates took a much larger swing lower this first quarter as analysts went from predicting 4.2% S&P 500 company profit growth in aggregate at the start of the quarter to modeling a decline of 13.7% through Friday morning. But even those dramatic estimate reductions weren’t enough to keep beat rates at their usual levels.
J.P. Morgan equity strategist Mislav Matejka said that only about 65% of the companies that have already reported results are beating estimates, the lowest beat ratio since the 2008 financial crisis.
“Amid the escalation of the COVID-19 crisis, and the sharp fall in activity, the S&P 500 is facing its worst quarter in a decade in terms of earnings delivery,” Matejka wrote in a note to clients.
In aggregate, earnings are missing consensus estimates by -0.5%, according to Credit Suisse’s U.S. Chief Equity Strategist Jonathan Golub, primarily because of a -22.3% miss by the financial sector. Over the past five years, the average aggregate earnings beat is 4.9%, FactSet’s Butters said.
Analysts seemed to have trouble gauging the impacts of the COVID-19 pandemic on bank earnings, even as they drove consensus estimates for J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM +0.62% to $1.87 a share just before the banking giant’s first-quarter report, down from the $2.65 projection at the start of the quarter. But that cut was nowhere near enough, however, as J.P. Morgan reported EPS of 78 cents, missing expectations by 58.3%.
Prior to this, J.P. Morgan had beaten estimates in 19 of the past 20 quarters, with an average beat rate of 8.4%. Despite the big miss, the average stock rating of 26 analysts surveyed by FactSet remained the equivalent of “buy”, even as the average stock price target dropped 16% from the end of March to $105.74.
It was a similar story for Boeing Co. /zigman2/quotes/208579720/composite BA -4.08% , which saw the pandemic touch “every aspect” of its business. Analysts anticipated a very weak showing as they modeled a $1.57 loss per share ahead of the report, far cry from the $3.08 per-share profit they predicted in December, but Boeing still missed by 8.4%, posting a loss of $1.70 a share.
Even as the company fell short of lowered expectations, Boeing’s stock surged 5.9% Wednesday following its earnings report, and gained another 1.4% on Thursday, before declining in Friday’s session. The average rating of 23 analysts remained the equivalent of “overweight”, according to FactSet, with not one analyst having a bearish rating.
In some cases, merely meeting earnings expectations seems to be cause for celebration, even if other metrics miss and overall trends are dreary.
Delta Air Lines Inc. /zigman2/quotes/200327741/composite DAL -4.19% reported last week its first quarterly loss in years, matching expectations, though revenue and load factor missed forecasts thanks to an 85% reduction in capacity. But the stock has rallied 5.1% since the report was released, and the average analyst rating remains overweight, with none of the 19 analysts surveyed by FactSet having a bearish rating.
Perhaps analysts are getting the message about their second-quarter estimates. The current consensus FactSet estimate is for S&P 500 earnings to decline 36% from a year ago, compared with expectations for growth of 5.7% at the start of the year.