Last night I received an email from Katie informing me of the day and time for our Parent/Teacher Conference for Francis. During this conference we will sit down with Francis’ teachers and discuss what he does well and areas that he can improve on. New this year is Francis will have participated in a developmental screening assessment using the Gesell Early Screener (GES). This is a tool that will gauge his developmental level to help the teachers better prepare lesson plans and goals. As a developmental preschool, the school is looking to ensure that they are meeting the students at their developmental level and providing the most nurturing and stimulating environment to foster growth. This is a new tool the school is using which I look forward to learning more about.
As I read through the Parent/Teacher Conference email, it got me thinking about how the school year is like how companies report their earnings. Many schools are on the quarter system which is similar to how companies report their earnings. At schools, the students receive a report card showing the subjects they are excelling in versus other subjects that may need improvement. Report cards for companies can include information about revenue, expenses, and number of users to name a few. These companies report cards are called their earnings reports.
Companies are now reporting their earnings for the period July-September 2020. As was previously mentioned in prior letters, the earnings for the second quarter decreased significantly due to the COVID-19 caused closures. Investors are looking for a sign of stability within each company and are looking forward to a time of normal earnings growth. Even with the upcoming election and the uncertainty of COVID-19, we can review a few items with earnings season upon us.
As seen in the below chart, even with a year-over-year decline in S&P 500 Index profits, the third quarter is showing a smaller decline as compared to the second quarter. According to FactSet, earnings estimates are expected to show a 20% year-over-year decline in earnings per share. There is certainly the potential for less decline due to various parts of the economy opening over the past few months. Although fewer companies have offered guidance because of the amount of uncertainty, 67% of the guidance companies have given has been positive, significantly higher than the five-year average of 32%.
Additionally, the economic growth picture in the United States has been positive in some parts of the economy. Some economists are expecting a more than 30% annualized growth in US gross domestic product (GDP) which would be positive for earnings.
As we review the earnings reports, there are a few things to watch for:
- Impact of COVID-19.How have companies reacted and what are they planning to do moving forward. Analysts have been increasing their earnings estimates even with the ongoing challenges of COVID-19. The economy has slowly continued to reopen, with the thought being economies may not go to as extreme of lockdowns if COVID-19 numbers increase significantly.
- Election front and center. As Election Day approaches, there will be continued talk about potential policy changes under various scenarios. Policy changes can impact specific industries which could ultimately impact earnings in 2021.
- Will the winners keep carrying the market? According to Credit Suisse, 54% of the market capitalization of the S&P 500 is on track to grow earnings in 2020. The technology sector has the potential to produce strong earnings growth in the third quarter. If this sector can continue growth, there is the potential they could be the foundation for growth throughout the entire market.
As previously mentioned, we believe stocks are trading on expected earnings for 2021 and beyond. In many ways, investors have given companies a pass for 2020 and told them to prove it once 2021 comes along. Many believe 2021 could be the time when some normalcy returns to the economy. Also, an additional stimulus could provide a tailwind to 2021 along with the successful development of a COVID-19 vaccine.
As a child, I was always nervous for my parents to attend my Parent/Teacher Conferences. Not because my grades were bad, but more so worried about what my teachers may say. Just as I was nervous about the conference, investors may be nervous about this earnings season. While these nerves are certainly understandable, we believe there is the potential for economic growth moving forward and most notably following the election as the unknown of the election will finally be past us.
Do not forget to RSVP for our webinar, “Election 2020: The Economy, Markets and You”, scheduled for October 29 at 5:30 PM (MST). Click here to RSVP with your name and any questions you would like answered during the call.
Have a great weekend.
Chris Zeches, CFP®