Pro Perspectives 10/19/20

October 19, 2020

It's a big earnings week.  We'll hear from about 20% of the S&P 500. 

To this point, for Q3, 86% of those that have reported have beaten earnings estimates — and 82% have beaten revenue estimates.

Positive surprises are great, but the earnings decline is running around 18% — that's aggregate earnings down 18% from the same period a year ago. 

Of course, earnings can opportunistically be managed lower/weaker.  And the pandemic environment offers an easy opportunity for companies to take their medicine now — to put all the bad news (write-offs, write-downs, divestitures, etc.) on the table, to optimize earnings coming out of the economic downturn.  

With that, what is maybe most interesting number to watch in this earnings season, is year-over-year revenue change.  On that note, despite the record economic contraction of the second quarter, the year-over-year Q3 revenue decline (to this point in the reporting) is only 3%.  

This is thanks, in large part, to the sharp recovery in personal consumption expenditures  — now down just 3.4% from the record highs of February. 

And PCE is thanks to this chart …   
Household net worth has recovered to record highs.

And that is clearly thanks to the multi-trillion dollar policy response, which has 1) put money directly in the hands of consumers, 2) kept many of them attached to a job, with the visibility of re-employment, 3) kept employers solvent, and 4) promoted higher asset values. 

So, the policy bridge has worked, to this point.  But as we know, the path of the economy depends on the path of the virus.  The positive news on that front:  While cases continue to grow, the death rate continues to decline

The case fatality rate continues to trend down — now down to 2.6%.  The infection fatality rate, which factors in the CDC's assumption on the real infection rate (which includes undiagnosed infections, which they believe to be at least 10x that of diagnosed infections) continues to converge toward the annual flu rate.  Applying a 10x multiple to diagnosed cases, we get a real infection fatality rate of 0.26%.  This argues for a continuation of the economic recovery path, even without more stimulus.