October 12, 2020 BARRON’S M3
mates have come primarily from energy
stocks rebounding from losses and smaller
loan-loss provisions at banks. If those are
removed, then “underlying growth” is ex-
pected to fall 13%, only a little bit better
than the second quarter’s 15% drop.
That’s true even though gross-domestic-
product estimates are signaling a strong
third-quarter recovery. The Atlanta Fed’s
GDPNow model, for instance, forecast a
35% rise as of Oct. 6. “This suggests the
consensus is likely again underestimating
the bounce in earnings,” Chadha explains.
So far it has. Of the 21 companies that
have released earnings so far this quarter,
90.5% have topped expectations. Even bet-
ter, the same percentage has topped revenue
forecasts, well above the 61% average. That
bodes well for a rebound in profits and sales
from the worst of the coronavirus crisis.
Unfortunately, all this doesn’t always
bode well for individual stocks. UBS strate-
gist Keith Parker notes that the 15 compa-
nies that reported earnings through Oct. 2
dropped an average of 1% on the trading
day following their releases. Thirteen of
these so-called early reporters beat sales
forecasts, but while FedEx (FDX) and Nike
(NKE) rose after beating them by at least
10%, eight of them, including Micron
Technology (MU), Adobe (ADBE), and
CarMax (KMX), dropped after their re-
leases. “[The] bar is high,” Parker writes.
“Thus far, a 10% sales beat seems to be a
cut-off for positive stock returns.”
But just because individual stocks may
struggle when they release earnings doesn’t
mean the market will. In fact, earnings sea-
son is historically a good time to own stocks.
The S&P 500 has averaged a 4.1% rise dur-
ing the last four reporting periods—defined
as the five weeks starting from the week of
JPMorgan’s earnings. If nothing else, earn-
ings take investors’ attention away from the
macro concerns of the day—whether it’s
Federal Reserve policy, trade wars, viruses,
or, these days, the presidential election—and
gives them something fundamental to focus
on. And of course, it’s those fundamentals
that eventually drive stocks higher.
Still, the S&P 500 is trading at about 21
times next year’s average earnings esti-
mates of $166.22. With valuations “lofty,”
according to Nicholas Colas, co-founder of
DataTrek Research, faster earnings growth
is the most likely path higher for stocks.
And that means that company guidance—
for the fourth quarter and beyond—could
play a big role in keeping the price/earnings
ratio manageable and stocks moving
higher. “Further upside revisions would, of
course, be helpful,” Colas explains.
Would they ever.
While JPMorgan’s earnings may mark
the unofficial start of earnings season, we’ll
be keeping a close eye on Goldman Sachs
Group (GS). Its stock has dropped just 8.9%
in 2020, far less than the 30% decline in the
SPDR S&P Bank ETF (KBE). That’s due to
its strong investment banking and trading
businesses and the fact that it has less expo-
sure to possible credit losses.
Those factors remain in play and could
help Goldman easily top earnings forecasts.
The company is expected to report a profit
of $5.44 a share when it releases its finan-
cials on Wednesday, Oct. 14. KBW analyst
Brian Kleinhanzl, with a recent estimate of
$6.15 a share, is far more optimistic. Not
only does he expect Goldman’s trading and
investment banking businesses to remain
strong, he expects the bank to have enough
capital to please regulators.
“[We] believe that GS will have capital
ratios above the [stress capital buffer] mini-
mum ratio which could lead shares to out-
perform at earnings,” he says.
Kleinhanzl has a $260 price target on
Goldman stock, which implies a 25% rise
from Friday’s closing price of $208.07.B
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
Oil & Gas 6.87%
Utilities 4.58
Basic Materials 4.20
Industrials 3.61
Health Care 3.47
Technology 3.10
Financials 3.05
Consumer Goods 2.37
Consumer Services 2.13
Telecommunications 0.10
- For breakdown see page M32. Source: S&P Dow Jones Indices
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