- With earnings season set to officially kick off on Tuesday, LPL is out with a list of three things to watch for in company results.
- LPL expects management teams to instill confidence in investors as an economic recovery from COVID-19 is well underway.
- “Mostly better-than-expected economic data during the quarter is a positive indication of earnings surprises,” LPL noted.
- Here’s what to watch for in the upcoming third quarter earnings season, according to LPL.
- Visit Business Insider’s homepage for more stories.
Investors will have a lot to digest over the coming weeks as third quarter earnings season kicks off amid an ongoing economic recovery from the COVID-19 pandemic.
According to FactSet, consensus estimates call for a 20% year-over-year decline in earnings per share, but LPL expects that figure to be “quite a bit better,” according to a note on Monday.
Over the past three months, consensus estimates have been improving for third quarter earnings, rising by about 4%, LPL observed.
This represents a “good sign that companies may be able to deliver more than the typical upside,” LPL said, adding that it expects management teams “to instill confidence” in investors that the earnings rebound might materialize.
US economic data in recent months is also supportive of this season’s corporate earnings, LPL explained. “Mostly better-than-expected economic data during the quarter is a positive indication of earnings surprises,” LPL said.
Here are three things to watch out for this earnings season, according to LPL.
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1. The impact of COVID-19
“The increase in analysts’ earnings estimates reflects increased confidence in the outlook, even with the challenges COVID-19 still presents in terms of social distancing, various safety protocols, and shifting consumer behavior. We have been encouraged by recent data pointing to a continued steady reopening of the economy, and we believe the likelihood that additional lockdowns may meaningfully impair business activity remains very low,” LPL said.
2. The election is front and center
“As Election Day approaches, we expect to hear more about how potential policy changes may affect companies, particularly those most sensitive to regulations such as energy, financial services, and healthcare. Questions about regulatory risk for technology companies, as well as digital media and e-commerce, will surely come up on conference calls, so look for updates there,” LPL said.
LPL added that it expects earnings growth only in the healthcare, technology, and utilities sectors this quarter.
3. The winners will keep carrying us
“According to Credit Suisse, 54% of the market capitalization of the S&P 500 is on track to grow earnings in 2020. We believe the chances are good that the technology sector and the digital media and e-commerce internet industry groups will produce earnings growth in the third quarter. As long as those winners keep winning, and we think they will, they provide a solid earnings foundation for the broad market,” LPL said.
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Bottom line, LPL expects companies to deliver a solid upside surprise in earnings this season, potentially above the long-term historical average of three to four percentage points, the note said.
In terms of returning to earnings growth, the first quarter of 2021 is the likely target date investors should watch, LPL said, while reaching the S&P 500’s pre-pandemic earnings level will also come in 2021.
“The combination of efficiencies gained during the recession, the strong performance of the winners, and the tremendous progress in COVID-19 treatment and vaccine development, all suggest we may be only a year away from reaching normalized earnings,” LPL concluded.