After last year’s holiday quarter hit a earnings recession, the same is not expected this year, but it’s not impossible and it could be three months late.
Quarterly benefits of the S&P 500 SPX,
they are expected to decline as fourth-quarter results emerge over the next few weeks, after declining in each of the first three quarters of 2020. Analysts predict a rebound throughout 2021, as well as fourth-quarter numbers to exceed their average expectations.
Sam Stovall, CFRA’s investment strategist, told MarketWatch that exceeding expectations for fourth-quarter numbers would be in line with historical patterns. Revenue exceeded expectations for more than 30 consecutive quarters before the first quarter of 2020, he said, when the pandemic first affected corporate results. An overall surpass in earnings this quarter would help expand a new chain of pulses to three in a row.
One of the key questions for FactSet analyst John Butters is whether profits could end up in positive territory during the quarter, even when estimates call for an aggregate 6.8% drop. Based solely on the five-year historical trend, it would not seem likely, but companies recorded much stronger rates in the last two quarters, meaning it could end the profit recession. The few fourth-quarter reports that have come in so far have exceeded earnings expectations by an average of 26.2%, Butters wrote.
What you need to know to prepare for 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 as categories such as leisure, hospitality and restaurants struggle. Cruise lines, hotels, and airlines are expected to experience huge negative fluctuations in earnings compared to a year earlier, which will help drag the S&P 500.
The energy sector is expected to be the biggest loser in the fourth quarter, with analysts surveyed by FactSet modeling a 101% decline.
“The causes of the fall are broad, in our view, across parts of the energy value chain both upstream and downstream,” CFRA analysts wrote.
West Texas Intermediate CL00,
analysts noted: “Getting almost 30% less for the product certainly hurts and with about two out of three barrels of oil equivalent consisting of liquids (like crude), the price drop was one of the main contributors ”.
According to FactSet, only four sectors are expected to get a positive boost in profits during the quarter, led by materials with projected growth of 8%. Within this sector, the metals and mining category, as well as industrial gases, could perform strongly, CFRA analysts said.
The other sectors that are expected to show positive growth are consumer commodities, healthcare and information technologies, according to FactSet.
The earnings season really begins next week, with 40 S&P 500 members reporting along with six Dow Jones Industrial Average DJIAs,
components. Highlights Netflix Inc. NFLX,
United Airlines Holdings Inc. UAL,
and Intel Corp. INTC,
That’s what we need to see over the next week.
Please note
Look for a steady stream of bank profits, led by Bank of America Corp. BAC,
and Goldman Sachs Group Inc. GS,
Tuesday morning, with Morgan Stanley MS,
follows a day later. Citigroup Inc. C,
and Wells Fargo & Co. WFC,
the financial parade began on Friday and both showed better profits than expected with disappointing results.
Bank shares have surpassed the S&P 500 since late September.
“A positive narrative has emerged: faster economic growth and an expansionary fiscal policy are driving up net interest income (NII) and falling credit costs, while the resumption of stock rewards is even higher plus profitability and EPS, ”UBS analyst Saul Martinez wrote in a note to clients, although he proceeds a little more cautiously in the sector. Among Martinez’s concerns is that “mortgage revenues should go down to earth from the high levels of 2020.”
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Netflix had a fiery 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 reports fourth-quarter results, which will show how popular shows like “The Queen’s Gambit” and a new season of “The Crown” affected subscriber trends.
Full preview: Netflix may be able to get a successful sequel to premature pandemic subscription
Another key area to monitor is the impact of price increases on dropout levels. The company raised prices in the U.S. and Canada during the fourth quarter and “evidence is growing that we will see widespread price increases in 2021,” according to Bernstein analyst Todd Juenger.
Netflix reports the results Tuesday afternoon.
End of an era
Intel is moving in a new direction after recently touching VMware Inc. VMW,
The chief executive, Pat Gelsinger, will take up his main role from mid-February. But investors will hear the old guard for the last time when the chip giant maintains its earnings call Thursday afternoon.
For more information, can Intel’s “Wonder Boy” get Steve Jobs out?
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 “strong progress in its 7-nanometer process technology and has planned to provide an “upgrade” along with the earnings. Intel also revealed that it expected its fourth-quarter revenue and earnings to exceed the company’s previous forecasts.
Intel has struggled in recent years for a series of misguided technological steps and will try to get back on track in 2021.
Slow climb
Domestic travel increased in the fourth quarter, especially during the holidays, but United Airlines and the rest of the airline industry still have a lot of pain ahead. Cowen & Co. analyst Helane Becker predicts industry first-quarter revenue could fall 45% from first-quarter 2019 levels, given depressed rates and slower vaccine deployment than anticipated. United will offer their perspective on the situation with their report on Wednesday afternoon and the earnings call on Thursday morning.
A slice of the Dow
Six components of the Dow Jones Industrial Average are on sale, starting with Goldman Sachs on Tuesday morning and then by Procter & Gamble Co. PG,
and UnitedHealth Group Inc. UNH,
on Wednesday morning. Travelers Cos. Inc. TRV,
starts the list on Thursday morning, while Intel and International Business Machines Corp. IBM,
rounds the next day of the closing bell.
IBM could share more information about a sales reorganization that is taking place in the company as it seeks to simplify the customer experience. “This move will intrinsically allow IBM to penetrate deeper into its customer base and increase its portfolio share,” EverI ISI analyst Amit Daryanani wrote in a recent note to customers.