Last week began the season of reports in the United States. According to FactSet, S&P 500 companies are expected to report a 6.8% decline in earnings for the fourth quarter of 2020. At the same time, positive "surprises" in company reports are not excluded. In this case, profit growth may be recorded in the fourth quarter. On average, over the past 5 years, the actual profit of companies was higher than the estimated 6.3%. Over the same period, 74% of companies in the S&P 500 index reported that actual earnings per share (EPS) exceeded the average estimate. On average, the rate of profit growth increases by 4% due to the number and magnitude of positive "surprises" in the profits of companies. If this average increase is applied to the estimated decrease in profit at the end of the fourth quarter (December 31) — by 9.2%, then the actual decrease in profit for the quarter will be 5,2% (-9,2%+4%). It is worth noting that in the second and third quarters of 2020, the actual profit exceeded the estimated average by 21.3%. The rate of profit growth increased by an average of 14 p. p. If we apply this value to the expected decline in profit in the fourth quarter, the actual rate of profit growth could be 4.8%. Of the 26 companies that have already reported, 96% reported that their actual EPS exceeded the average estimate. In total, the excess of the actual profit of these companies over the estimated one was 26.2%. Thus, at the earliest stage of the reporting season for the fourth quarter, profit figures compared to estimates tend to approach those of the previous two quarters, rather than the five-year average. Since December 31, S&P 500 earnings have improved by 2.4 percentage points, from -9.2% to -6.8%.
Source: BCS