Here’s How Rotten Corporate Earnings Will Be This Year

Big surprise, not: Corporate earnings per share (EPS) for this year are expected to be lousy. But how lousy? Try negative 8.3% for the S&P 500 for all of 2020, according to S&P Capital IQ’s consensus of analysts.

When you look at recent history, that looks benign. In 2008, the worst year of the Great Recession, EPS tumbled by 77.5%.

The growth—or collapse—of the current economy, of course, is key to what earnings will do up ahead. The gloomier estimates have gross domestic product (GDP) for all of 2020 shrinking radically, with the worst outlook being JPMorgan’s second quarter forecast of a 40% drop.

Modeling for what may happen is difficult because there are no historical precedents. The economy’s course hinges on the unpredictable coronavirus, which may be peaking in the United States, yet also may return later.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Let’s look closely at the prognostications for this year. For EPS in 2020’s second quarter, which Wall Street believes will be the worst of the year, the analysts’ consensus is for minus 17.9% (that’s versus 2019’s second period). You think that’s bad? The Jerome Levy Forecasting Center has predicted a second quarter EPS slide of 60%, although that was without factoring in all the Washington help that is supposedly on the way.

At the moment, analysts believe that the EPS performance for this year’s first three quarters will be in the red, with a small increase in the fourth (0.5%).

That little bit of sunny thinking for this year’s fourth quarter may be nothing but whimsy, certainly. “With economic growth projections continuing to be slashed for 2020,” wrote Sam Stovall, chief investment strategist at CFRA Research, in a recent report, “we think that eventually all four quarters of the year could see year-over-year declines.”

At the moment, all eyes are on how first-quarter EPS comes in. Indeed, 2020’s initial three months never were expected to be a blockbuster, and in late January, the consensus was for a 9.1% earnings expansion for this year as a whole and 3.7% for the first quarter.

To some observers, though, in light of full-year 2019’s flat results, even those predictions looked too good to be true. Today, the national lockdown of the economy has sent unemployment soaring and can only be poison to EPS.

For 2020’s first quarter, whose reporting season has just started, analysts say seven of the 11 sectors in the S&P 500 are projected to be in negative territory, led by double-digit declines for consumer discretionary, energy, and industrials. The increases are confined to consumer staples, utilities, health care, and information technology.

The first two are noncyclical (meaning they tend to be insulated from economic downturns) and the other two have special advantages. Tech benefits from long-term trends, such as the move to cloud computing, while some companies currently are in high demand from shut-in Americans, such as Zoom Video Communications, with its much-sought-after videoconferencing capability.

Meanwhile, just 41% of the 126 sub-industries in the S&P 500 are expected to post EPS gains for the first quarter. The leaders here are gold, diversified chemicals, and oil and gas refining and marketing. The biggest losers: airlines, copper, department stores, and leisure products.