After a sharp decline in economic activity during the first half of the year, the U.S. economy bounced back strongly in the third quarter. Against this backdrop, profit growth has come back nicely as well, with 3Q20 S&P 500 earnings per share expected to have grown 25.1% from the prior quarter. While this still leaves earnings down -14.9% year-over-year, results have generally been better than expected. With 26.4% of companies reporting, our current estimate for 3Q20 S&P 500 operating earnings per share is 33.87 USD; so far, 83% of companies have beaten earnings estimates and 77% of companies have beaten revenue estimates, both of which are well above long-run averages.

Analysts set the bar too low coming into the 3Q20 earnings season, as evidenced by the fact that those sectors most impacted by the pandemic – consumer discretionary, energy, industrials, materials and financials – are seeing earnings surprise significantly to the upside, despite being lower on a year-over-year basis. At the same time, earnings growth has been positive across the technology, health care, consumer staples and utility sectors, yet still has come in better than expected.

Additionally, we are seeing companies begin to provide guidance after suspending it in early 2020. This suggests that managements are feeling more confident in the outlook, but it is important for investors to recognize that the return of guidance has coincided with better-than-expected earnings. As a result, we believe that 2021 earnings may not bounce back as strongly as many believe; if this is indeed the case, consensus estimates for earnings growth of 41% will need to come down in the coming months.

From a portfolio standpoint, we continue to advocate for an approach characterized by balance between growth and value. We like growth from a structural standpoint, but would encourage investors to increase their active share in order to avoid valuation and positioning risk. At the same time, value looks cheap on a relative basis, and should outperform as economic activity accelerates and inflation expectations rise. The challenge, of course, is knowing exactly when this environment will materialize.

3Q20 earnings reports have been better than expected 
Share of reported companies beating estimates by sector

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Data are as of October 27, 2020.

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