3Q Corporate Earnings Look Better and Better, Yardeni Says

Whew, battered corporate earnings are recovering, and are en route to becoming positive again next year, by the reckoning of Yardeni Research.

The stock market mostly looks to the future, rather than at the past. That’s the big reason for the Dow Jones Industrial Average reaching 30,000 last week. In that spirit, the earnings trend, a vital component of how equities will fare ahead, is encouraging.

Seems like third quarter S&P 500 earnings will drop just 7.1%, versus the year-before period, according to Yardeni. If so, such a result sure beats the mid-year analysts’ consensus for the third quarter, 26.5%. This latest outcome is calculated with all save a handful of companies reporting for the September-ending span. And it comes with 80% of the companies beating analysts’ expectations.

A minus 7.1% showing is a lot better than the previous two quarters this year: negative 15.4% for the first and down 32.3% for the second. For 2020’s final quarter, Yardeni predicts a more serious decline, 17.3%—which means the entire year would suffer a 17.2% slide.

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But, come 2021, things should be looking up, Yardeni forecasts, with earnings per share (EPS) climbing back to almost equal 2019’s number, $163. Should everything go right, then economic expansion will resume: Pantheon Macroeconomics expects the US economy will increase 5% next year, as opposed to this year’s estimated contraction of 3.5%.

The buoyant prognostications stem from what Barclays analysts call “a perfect trifecta of outcomes” for the current stock rally. The virtuous trio are: news of apparently imminent approval and distribution of coronavirus vaccines, a settled US election, and better-than-expected earnings.

Goldman Sachs economists anticipate the first vaccines will be given to at-risk Americans in mid-December, which should bring noticeable health benefits in 2021’s first quarter. Broad availability will commence in April, the firm contended, sparking a lifting of global economic growth in the second quarter.

Small wonder that new investment has started flowing into domestic equity mutual funds and exchange-traded funds (ETFs), reversing a long spell of outflows. The stock funds received roughly a net $25 billion in the past two weeks, as measured by the Investment Company Institute (ICI). From January through October, the stock fund outflow totaled $532 billion.

In earnings terms, it’s interesting that the bad news from three industries—oil, airlines, and hotels—has dragged the entire S&P 500 down. If they were excluded, the index’s EPS would have risen 4.%. That’s from a study using results ending November 20, more than a week ago, from FactSet’s senior earnings analyst, John Butters. These three have been the hardest hit by the pandemic. Should the virus finally recede, the three pummeled industries’ recoveries should be marked.