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Earnings Seasons Observations

Earnings Seasons Observations

| February 19, 2020
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The recent news that technology giant Apple would miss its fourth quarter 2020 revenue targets has understandably increased investor anxiety surrounding the potential economic impact of the coronavirus (now called COVID-19). Lost in those headlines is corporate America’s impressive performance this earnings season.

“Companies have done an admirable job growing profits considering stiff headwinds,” said LPL Financial Chief Investment Strategist John Lynch. “Despite slowing global economic growth, weakness in capital investment and manufacturing, a strong US dollar, and a huge drop in energy sector profits, S&P 500 companies are impressively grinding out 1-2 percentage points of overall earnings growth.” The fourth quarter earnings growth may cement the third quarter of 2019 as the trough, as shown in the LPL Chart of the Day below.

corporate-america-grinding-out-small-earnings-gain-in-q4

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Some highlights of this earnings season:

  • Solid revenue upside. A solid 65% of S&P 500 Index companies have beaten revenue estimates, the highest level since second quarter 2018 and well above the long-term average at 57%. S&P 500 companies have produced a larger-than-normal nearly one percentage point positive revenue surprise and are tracking to a 3.5% top-line increase.

revenue-tracking-nicely-ahead-of-expectations-in-q4

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  • Respectable earnings upside despite headwinds. The earnings beat rate at 71% is slightly above the 10-year average (70%). S&P 500 earnings growth has surprised by a solid 4.4% so far despite economic, currency, and commodity headwinds.

corporate-america-grinding-out-small-earnings-gain-in-q4

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  • Consider the energy drag. Though 1-2% overall earnings growth isn’t much, the gain is approximately 4%, excluding the energy sector.
  • Sector standout. One of the most China-exposed sectors produced one of the biggest upside earnings surprises: Technology. Technology sector earnings growth is tracking to a 5% year-over-year increase, about 9 percentage points above prior estimates.
  • Reassuring outlooks. Estimates for S&P 500 earnings per share in 2020 have only fallen by about 0.9% since December 31, 2019. Though these numbers may come down a bit more in the coming days and the China situation remains fluid, this modest reduction reflects U.S. companies’ resilience overall amid significant supply chain disruptions.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

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