Commentary from Myles Zyblock, Chief Investment Strategist, Dynamic Funds

Yesterday, Dynamic Funds’ Chief Investment Strategist, Myles Zyblock, offered his thoughts on the Q3 Earnings results.

Earnings Rocket Past Expectations

Third quarter reporting season is effectively complete with filings from nearly 95% of S&P 500 constituents now in the books. Expectations were surpassed across the entire capitalization spectrum with a record proportion of positive surprises. Breadth of beats was +80% while both top- and bottom-line growth projections were exceeded by a wide margin. S&P 500 earnings growth still contracted but only at a -7.1% rate instead of the initial -18% estimate. Sales came in at -1.8% compared to the -5.6% target.

The small-cap segment of the equity market was the most impressive with an earnings surprise of +57% for Q3. Analysts were far too pessimistic for these names as actual S&P 600 EPS performance came in at -7.6% compared to the -48% estimate. For the S&P 500 sectors, Health Care, Information Technology, and Consumer Staples stood out as the sectors with the highest breadth of beats and were positive year-over-year for both earnings and sales.

Bottom-up consensus estimates suggested that this quarter would be the trough in aggregate earnings and the strong results certainly helped support that prediction. S&P 500 trailing earnings has fallen 14.3% since peaking in February 2020 and currently stands at $140. If estimates are met over the coming year, the Index should see +16.7% growth and a full recovery by November 2021 (see the chart of the week below).

• The strong start to earnings season reported in our preview a month ago held up to the end with results remaining heavily skewed to the upside. The breadth of beats for earnings and sales are well above average for all capitalization segments. Economic uncertainty around COVID-19 and the lack of management guidance likely caused analysts to set very low targets.
• The magnitude of earnings surprises has also been very strong with double-digit beats for all three indices. The S&P 600 stands out with a stellar +57% surprise.

Earnings Growth Came in Far Above Expectations

• Q3 2020 earnings growth targets were slashed leading up to reporting season and the final results suggest that the analyst community were far too pessimistic. Only single-digit contractions were seen in earnings compared to the staggering double-digit projections.
• A similar story is seen for the top-line as actual sales growth also fell much less than anticipated in Q3.

All S&P 500 Sectors Beat Earnings Growth Projections

• Every major S&P 500 sector surpassed earnings growth expectations in Q3. Five of them, including Health Care, Consumer Staples, Communication Services, Information Technology, and Utilities, posted positive quarterly year-over-year earnings growth.
• Almost the same story was seen for top line (sales) growth, but Materials came in slightly lower than expected. The relative order of growth for sales mirrored that of earnings in Q3 with defensive sectors posting the highest growth rates.

(End of Myles Zyblock commentary)

Weekly Update – By The Numbers

Source: Yahoo! Finance, CNBC.com, Dynamic Funds

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.