COVID-19 Market Update: Q3 Earnings Surprises

Most major indices struggled last week, losing ground over the previous week’s close. The TSX gave up 90 basis points (year to date -4.5%), the S&P 500 lost 53 basis points (year to date 7.26%). The Nasdaq was the biggest loser dropping 1.08% for the week (year to date 28.71%), EAFE lost 40 basis points (year to date -8.00%), while the broader-based Russell 2000 gained .36 basis points (year to date -1.73%). Apple help drag the Nasdaq lower, with the technology sector the weakest of the S&P 500 Index. Facebook and Alphabet (the parent company of Google) gained during the week despite news the latter is the subject of a Justice Department antitrust lawsuit. Social networks are also coming under increasing scrutiny of the US Republican-controlled Senate to target and censure conservative points of view.

The negotiations over the US stimulus package continued throughout the week with President Trump announcing that he would approve a bigger relief package than proposed by the Democrats over last weekend. Of course, during last week’s presidential debate, President Trump again mentioned his opposition to bailing out cities and states. The Republican-led Senate persisted that a package for businesses and individuals need not be as large as proposed. As we move into the last week before the election, generally, it is agreed a package is unlikely until after the election, with the size depending on the election results.

Economic data was generally encouraging, with initial unemployment claims falling 55,000 to a seasonally adjusted 787,000 for the week. Prior weeks were revised lower, reflecting new data from California after suspending data collection to address the backlog and enhance fraud-prevention abilities. The drop in claims marks a change in the three-week trend of increasing initial claims. Continuing claims, the number of people collecting unemployment benefits through state-run programs, dropped by 1 million to 8.4 for the week ending October 10. While this could reflect recalling furloughed workers, some suspect it indicates workers coming off benefits. The National Association of Realtors reported housing existing home sales increased by 9.4% in September. Consumer spending also showed strength, rising 1.9% in September, although not at pre-pandemic levels.

Last week marked the start of Q3 earnings announcements. According to Factset1, on October 23, 27% of the S&P 500 companies have reported, with 84% reporting earnings surprises above previous estimates. The five-year average earnings reporting above estimate is 73%, and at 84%, matches a previous high since Factset started collecting the data in 2008. The average surprise is the second-highest recorded at 17.2% above estimates, which exceeds the average surprise of 5.6% and only trails Q2 earnings surprise increase of 23.1%, the highest since 2008.  While this is positive news, it should be remembered the S&P 500 is reporting a year-over-year decline in earnings of 21% at the end of Q3.

Revenues for 81% of the reporting companies grew in aggregate by 3.1%, beating estimates. The average 5-year revenue beat is .7%. To date, the year-over-year revenue decline is -3.6%. Five sectors are reporting year-over-year revenue growth, led by healthcare. Six sectors are reporting year-over-year decline in revenue, led by the energy and industrial sectors.

Analysts estimate a Q4 decline in earnings year-over-year of -11.6% and a return-to-earnings growth starting in Q1 2021 of 14.3%. The current forward 12-month P/E ratio is 21.7.

As we progress toward the end of the year, the volatility is expected to increase; however, elections have proven a distraction to long-term returns. During these periods of uncertainty, asset allocation should remain steady as the economy improves. The trends in place will continue, and no matter who wins the election, the only difference is the timing and magnitude of those trends.




Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

To contact Sightline and request a full Smart Money Market Report, fill out the contact form below

CALL US AT 866.889.1909

Please note we only serve clients who reside in Canada.
I would like to receive ongoing news and information from Sightline Wealth Management

Recent Articles