By Emily Bary
After the holiday quarter last year snapped an earnings recession , the same is not expected this year — but it isn’t impossible, and may happen three months late.
Quarterly profits for the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36% are expected to drop as fourth-quarter results roll in during the coming weeks, after declining in each of the first three quarters of 2020. Analysts predict an upswing throughout 2021, though, as well as fourth-quarter numbers that beat their average expectations.
CFRA Chief Investment Strategist Sam Stovall told MarketWatch that beating expectations for fourth-quarter numbers would be in line with historical patterns. Earnings topped expectations for more than 30 quarters in a row before the first quarter of 2020, he said, when the pandemic first took a toll on corporate results. An overall earnings beat this quarter would help extend a new string of beats to three in a row.
One key question for FactSet analyst John Butters is whether earnings could ultimately end up in positive territory for the quarter, even as estimates call for an aggregate 6.3% drop. Based solely on the historical five-year trend, it wouldn’t seem likely, but companies posted much stronger beats over the past two quarters, meaning an end to the earnings recession could be a possibility. The few fourth-quarter reports that have come in so far have exceeded earnings expectations by about 26.2% on average, Butters wrote.
What you need to know to prepare for earnings season: Expect another quarter of big earnings beats
The pandemic has had an unequal impact on businesses, with digital giants like Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +0.60% and Zoom Video Communications Inc. /zigman2/quotes/211319643/composite ZM -0.73% benefiting from an increasingly remote world while categories like leisure, hospitality and restaurants struggle. Cruise lines, hotels and airlines are expected to see huge negative swings in earnings compared with a year earlier, helping to drag down the S&P 500.
The energy sector is expected to be the biggest loser for the fourth quarter, with analysts surveyed by FactSet modeling a 101% decline.
“The causes of the decline are broad, in our view, across both upstream and downstream portions of the energy value chain,” CFRA analysts wrote.
West Texas Intermediate /zigman2/quotes/209723049/delayed CL00 -0.19% , the benchmark for U.S. crude oil, saw an average price of $40 a barrel during the quarter, 29% lower than a year prior, the analysts noted: “Getting almost 30% less for one’s product certainly hurts, and with about two out of every three barrels of oil equivalent consisting of liquids (such as crude), that price decline was a major contributor.”
Only four sectors are expected to deliver positive earnings momentum in the quarter, according to FactSet, led by materials with projected growth of 8%. Within that sector, the metals and mining category, as well as industrial gases, could be strong performers, the CFRA analysts said.
The other sectors projected to show positive growth are consumer staples, health care, and information technology, per FactSet.
Earnings season kicks off in earnest in the week ahead, with 40 members of the S&P 500 set to report along with six Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.48% components. Highlights include Netflix Inc. /zigman2/quotes/202353025/composite NFLX -0.49% , United Airlines Holdings Inc. /zigman2/quotes/205037281/composite UAL -0.45% , and Intel Corp. /zigman2/quotes/203649727/composite INTC -0.42%
Here’s what to watch for in the week ahead.
Look for a steady stream of bank earnings, led by Bank of America Corp. /zigman2/quotes/200894270/composite BAC +1.06% and Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +1.11% on Tuesday morning, with Morgan Stanley /zigman2/quotes/209104354/composite MS -2.76% follows a day later. Citigroup Inc. /zigman2/quotes/207741460/composite C -0.12% and Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC +3.79% began the financials parade Friday, and both showed better profit than expected with disappointing revenue results.
Goldman Sachs saw its profit more than double in the latest quarter and exceed the consensus forecast. Bank of America beat profit expectations but saw its revenue fall short .
Bank stocks have outperformed the S&P 500 since the end of September .
“A positive narrative has emerged: faster economic growth and expansionary fiscal policy drive rising net interest income (NII) and falling credit costs, while the resumption of share buybacks further boosts profitability and EPS,” UBS analyst Saul Martinez wrote in a note to clients, though he’s proceeding a bit more cautiously on the sector. Among Martinez’s concerns is that “mortgage income should come down to earth from elevated 2020 levels.”