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With the second quarter of the 2020 reporting season mostly behind us, and with markets testing “all-time” highs, do earnings support the bullish thesis? Such is the fundamental question surrounding the debate over the record deviation between “momentum” and “growth.” 


No Real Surprise


As we stated before the earnings season began, the annual “beat the estimate” game would, as always, have a high “beat rate.”


“SO EXCITED! – It’s almost Millennial Soccer season on Wall Street where companies begin to beat estimates on drastically lowered expectations.” 


Why do I call it “Millennial Soccer” season? As I explained in “The Truth About Wall Street Analysis.”


Earnings season is now a ‘game’ where no one keeps score. The media cheers, and everyone gets a ‘participation trophy’ just for showing up.”


Not surprisingly, after cutting earnings estimates drastically following the first quarter, companies reported a record “beat” rate.


fundamentally, Fundamentally Speaking: Earnings Don’t Support Bullish Thesis


With 90% of companies reporting, we can safely say – “everyone got a trophy.”


Such a high “beat rate” certainly “seems” to suggest companies are firing on all cylinders, and that currently elevated prices are justified.


However, as they say, the “Devil is in the details.” 


Upward Revisions Not What They Seem


Let’s start with the “estimate revisions,” which have been touted by the bulls as clear evidence of support for lofty valuations. The chart below is the “revision breadth” by analysts for the S&P 500.


fundamentally, Fundamentally Speaking: Earnings Don’t Support Bullish Thesis


While these revisions from extremely negative levels are significant, and investors rush to chase extremely overvalued “momentum stocks,” the overall “earnings season” was quite dismal. As noted by FactSet: 


Earnings Growth: For Q2 2020, the blended earnings decline for the S&P 500 is -33.8%. If -33.8% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings reported by the index since Q1 2009 (-35.4%).


Earnings Guidance: For Q3 2020, 11 S&P 500 companies have issued negative EPS guidance and 34 S&P 500 companies have issued positive EPS guidance. (Only 10% issued guidance, which leaves analysts guessing at future results)


Valuation: The forward 12-month P/E ratio for the S&P 500 is 22.3. This P/E ratio is above the 5-year average (17.0) and above the 10-year average (15.3).


Pay very close attention to the chart below.


Paying More For Less


Below is the evolution of estimates from Standard & Poors from the beginning of this year.


fundamentally, Fundamentally Speaking: Earnings Don’t Support Bullish Thesis


Let me point out some critical points:


  • In January and February, investors were bidding up stocks to all-time highs based on REPORTED earnings of $171/share by the end of 2021.

  • Today investors are paying the same price for 2021 earnings that are $20/share lower. 

  • While earnings revisions did tick HIGHER at the beginning of August, estimates through the end of 2020 hit a new low just 2-weeks later.

The message here is simple.


  • In January of 2020, investors were told to buy stocks because valuations were cheap based on 2021 estimates. 

  • In August of 2020, investors are being told the same, but they are paying more for less. 

But what about those upward revisions?


Estimate Revisions Are Small

Look at the chart above again. You will notice there have indeed been upward revisions to estimates through the end of the year. However, they have been tiny relative to the increase in asset prices. FactSet also made a note:


“During the first six months of CY 2020, analysts lowered earnings estimates for companies in the S&P 500 for the year. The CY 2020 bottom-up EPS estimate (which is an aggregation of the median 2020 EPS estimates for all the companies in the index) declined by 28.7% (to $126.86 from $177.81) during this period.


This marked the largest decrease in the annual EPS estimate for the index over the first six months of the year since FactSet began tracking the annual bottom-up EPS estimate in 1996.


Not surprisingly, given the record-level cuts to EPS estimates during the first half of the year, it resulted in the elevated “beat rate” as noted above.Given the high beat rate, analysts are confident in increasing their estimates for the next quarter.


Since June 30, the CY 2020 bottom-up EPS estimate has increased by 3.5% (to $131.30 from $126.86).”