62% of SP 500 Market Cap Might Have Better Earnings Than You Think

As Mike Goldberg used to say when the UFC’s headliner match and usually much anticipated Fight of the Night would start “Here We Go”  as this week the SP 500 prepares to start Q1 ’20 earnings and financial results.

The Financial sector kicks us off as 8 big-name Financials will report their Q1 ’20 results by Wednesday morning’s opening bell, AND more importantly with Q1 ’20’s results, we will get Q2 ’20 guidance.

In terms of the current IBES SP 500 EPS data, here is how the expected growth rates look today for Q1 and Q2 ’20 for the 11 SP 500 sectors:

The expectations are grim for SP 500 earnings, for most of 2020.

Reading the various earnings-related commentary, most pundits are expecting a mid-point of $125 for SP 500 earnings for 2020. That may be too pessimistic.

Remember, “consumption” is 2/3rd’s of GDP, and retail sales are a lions share of consumption, and as of mid-March retail Sales went from pretty strong to almost zero.

Any business tied to the consumer that isn’t e-commerce or essential use has likely seen at least a 50% drop in revenue and earnings.

Q1 ’20 ranked from strongest to weakest expected EPS growth: 

  • Communication Serv: +7.4%
  • Info Technology: +2.5%
  • Utilities: +2.2%
  • Health Care: +1.3%
  • Real Estate: +1%
  • Cons Staples: +0.7%
  • Basic Materials: -13.9%
  • Financials: -16.8%
  • Cons Discretionary: -29.3%
  • Industrials: -30.8%
  • Energy: -49.6%
  • SP 500 -9%

Q2 ’20 ranked from strongest to weakest expected EPS growth:

  • Utilities: +3.4%
  • Info Tech: -0.1%
  • Cons Spls: -1.7%
  • Real Estate: -2.7%
  • Health Care: -3.9%
  • Comm Services: -10%
  • Basic Materials: -17.8%
  • Financials: -23.1%
  • Cons Discretionary: -45.7%
  • Industrials: -53.1%
  • Energy: -119.3%

Only one sector as of today – April 11th, 2020 – is expected to show positive EPS growth for Q2 ’20 and that is Utilities, and we’ll see if that holds up.

Here is what’s interesting: let’s look at the top 3 or 4 sectors of the SP 500 and see the expected chronological progression of expected sector EPS growth rates:

Technology: 25% of SP 500 market cap 

  • Q1 ’20: +2.5%
  • Q2 ’20: -0.1%
  • Q3 ’20: +3.5%
  • Q4 ’20: +5.7%

No surprise that Apple is Tech’s largest component with 20% earnings weight for the sector, but Microsoft is the sector’s largest market cap and the #1 stock in terms of market cap in the SP 500. Microsoft matters too. The cloud is benefiting from the stay-at-home workplace shift although there is some weakness in the core PC biz, which Microsoft warned about a month ago. I guess the question for Apple is will the growth in Services and Wearables be impaired by the shutdown or will that growth continue to offset the iPhone market maturity, which is now more of a “Tech cyclical” business.

Microsoft and Apple alone are 10% of the market cap of the SP 500.

Health Care: 15% of the SP 500 market cap 

  • Q1 ’20:  +1.3%
  • Q2 ’20:  -3.9%
  • Q3 ’20: +5.3%
  • Q4 ’20: +10.2%

Of the top 10 names in the XLV (Health Care ETF), Johnson & Johnson (JNJ) and United Health Care are 18% of the market cap of the ETF and then rounding out the top 10 names, large-cap pharma which Amgen is a included in, is 20% of the market cap. If JNJ or one of the large-cap pharma’s do what Abbott did in the last few weeks, with the 5-minute test, Covid-19 and the requisite worries over the virus might fade quickly. I wonder if the investors are overlooking the speed at which an anti-viral or other short-term solution could be found as a long-term vaccine is developed. America being America, I have no doubt the health care giants are directing a LOT of R&D firepower to come up short and long-term solutions for beating Covid-19.

Financials: 11% of the SP 500 market cap

  • Q1 ’20: -16.8%
  • Q2 ’20: -23.1%
  • Q3 ’20: -16.3%
  • Q4 ’20: -12.6%

The Fed reducing the fed funds rate back to zero (like post 2008) is not a plus for the longer-term “net interest margin” for banks, but a bank like JP Morgan has many different ways to generate revenue. US banks came into the pandemic with healthy amounts of capital and healthy dividends, but thanks to the renewed social antagonism around share buybacks, that might be why the chronology of SP 500 earnings this year looks they way it does. The recovery in the US credit markets like corporate high-grade, high-yield and mortgage markets will definitely help stem some of these negative y/y growth rates after Thursday’s additional $2.7 stimulus announcement.

Communications Services: 11% of SP 500 market cap

  • Q1 ’20: +7.4%
  • Q2 ’20: -10%
  • Q3 ’20: -0.6%
  • Q4 ’20: -5.3%

Facebook and Alphabet are not just top 5 names in the SP 500 market cap ranking, but the two stocks are also 40% of the XLC (Communication Services ETF).

Advertising spending has been weaker, but that’s been in the news for a few weeks.

Summary / Conclusion:  The goal was not to make this Saturday morning write-up “War & Peace” but I do think investors need to look at not just 2020 SP 500 EPS and revenue growth but 2021 SP 500 EPS since the market is looking forward as well as was written about Wednesday night on this blog.

Thursday was a huge day for corporate high yield as the HYG jumped 6.5% on the day and 9.5% on the week, following the additional $2.7 trillion in stimulus directed at the corporate bond market.

With expectations of 30% to 50% drops in GDP for Q2 ’20 and unemployment rates expected between 10% – 20%, the economics are grim, but the numbers from the heaviest market cap sectors may hold up pretty well.

That’s one opinion: take it with substantial skepticism and form your own opinions based on your own financial profile and situation.

Thanks for reading.




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