USA: Corporate earnings collapse

The reporting season in the USA started last week. In the second quarter, corporate earnings are likely to have fallen by almost 50% year-on-year. This would be the sharpest drop since the 2008 financial crisis.

In particular, corporate earnings in the energy and consumer goods sectors are likely to have fallen significantly. Energy companies suffered from the low price of oil, while consumer goods manufacturers felt the impact of the collapse in demand and disrupted supply chains. Airlines, car manufacturers and companies in the travel & leisure industry (hotels, cruise ships, casinos) were particularly hard hit. Many of the companies are in the red. They are partly dependent on state aid.

Analysts do not expect profits to rise in any of the eleven US sectors. Even the cyclically stable utility stocks are likely to have earned less than last year. The same applies to the IT sector, where profits are expected to fall by ten percent. In general, only a dozen or so companies are likely to report earnings growth. These include companies in the software, healthcare and gold mining sectors.

Despite the weak development in the second quarter, the bottom of the profit trend has probably been passed. Economic restrictions have been eased and demand is picking up. This trend should continue as long as the US states do not reverse the easing.

For the year 2020 as a whole, earnings are currently expected to fall by 22 percent. Analysts then expect corporate earnings to recover by 30 percent in 2021. In 2022 a further increase of 15% is expected. However, these forecasts should be treated with caution. Equity analysts focus on estimates for the current and following quarter, less on long-term forecasts.

The long-term earnings outlook also depends largely on when the pandemic will be brought under medical and economic control. So far, the USA has not been able to stop the spread of corona infections.

In our view, the valuation of the US stock market is expensive. Based on the estimated year 2021, the price-earnings ratio is 23.3, which is 20 percent above the historical average. We therefore see hardly any price potential for the S&P 500 over the course of a year.

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