Wall Street's fourth-quarter earnings season kicks off this week, with JPMorgan Chase (NYSE :), Citigroup (NYSE 🙂 and Wells Fargo (NYSE 🙂 ready to report their latest financial results before the U.S. open on Friday. January 15
FactSet data shows that analysts expect fourth quarter earnings to decline 8.8% compared to the same period last year, mainly due to the continued negative impact of the COVID 19 pandemic.
If confirmed, the fourth quarter of 2020 would mark the third largest, year-over-year (yoy) drop in revenue reported by the index since the third quarter of 2009, only after the first and second quarters of this year. It will also be the seventh time in the past eight quarters that the index has reported a year-on-year decline in earnings.
Seven sectors are expected to report a year-over-year decline in revenues, led by Energy, Industrial and Consumer Discretionary sectors. On the other hand, four, led by Materials and Healthcare, are expected to report annual earnings growth.
The revenue expectations are a bit more encouraging. Sales growth is expected to grow by 0.4% from a year ago. If confirmed, this will be the first time the index has reported annual revenue growth since Q1 2020.
Six of the 11 sectors are expected to report annual revenue growth, led by the Healthcare sector. In contrast, five are forecast to report a decline in annual revenue growth, again led by the Energy and Industry sectors.
Below, we break down two sectors whose financial results are expected to be the deepest plunge and one where revenues are expected to be relatively strong.
Energy: Lower Oil Prices on Hammer Results
Expected fourth quarter earnings per share decline: -98.4% yoy
Expected revenue decline in the fourth quarter: -32.7% year-on-year
The energy sector is expected to show the largest year-over-year earnings decline of all eleven sectors, with FacSet projecting a staggering 98.4% drop in earnings per share for the fourth quarter from a year earlier.
With low crude oil prices weighing on the sector – the average oil price in Q4 2020 was $ 41.94 a barrel, 26% below the average price of $ 56.87 in Q4 2019 – will be also expected a 32.7% decline in revenue, the largest year-on-year decline in all eleven sectors.
Two companies stand out from the group with forecasts for significant profit declines. Valero Energy (NYSE :), which is expected to record a loss of $ 1.22 per share, compared to earnings of $ 2.13 per share in the same period a year ago. The second is Phillips 66 (NYSE :), which is expected to report a loss of $ 0.54 per share, compared to earnings per share of $ 1.54 a year earlier.
The other notable name will undergo a significant reduction in the fourth quarter. earnings are Chevron (NYSE :), which is expected to register earnings of $ 0.07 per share, much lower than earnings per share of $ 1.24 in the same period a year earlier.
Indeed, the Energy Select Sector SPDR® Fund (NYSE 🙂 – which tracks a market capitalization-weighted index of US energy companies in the S&P 500 – is down 27% over the past 12 months, compared to nearly 16% of the S&P 500 in the same time frame.
In addition to Big Oil stocks such as Exxon (NYSE 🙂 and Chevron, some of the largest holdings include Schlumberger (NYSE :), EOG Resources (NYSE :), Marathon Petroleum (NYSE 🙂 and Kinder Morgan ( NYSE :).
Industry: Airlines Expected to Lead the Yearly Decline
Expected decline in earnings per share in the fourth quarter: -34.8% year-on-year
Expected sales decline in the fourth quarter: -10.6% year-on-year
Industry is expected to report the second highest annual income decline of all eleven sectors, at -34.8%.
Of the twelve industries in the sector, five are expected to report a double-digit earnings decline: Airlines (-347%), industrial conglomerates (-21%), trading companies and distributors (-13%), electrical equipment (-11%) and construction products (-10%).
The Industrial sector is also expected to report the second largest year-on-year revenue decline, down 10.6%. The aviation industry is again expected to be the largest contributor to the year-over-year decline in revenues, at -66% as it continues to offset the negative impact of the ongoing coronavirus health crisis.
Not surprisingly, the US aerospace industry has underperformed the broader market dramatically over the past 12 months}}, with the industry's main publicly traded fund – the US Global Jets ETF (NYSE 🙂 – about 29 % down year on year.
include, Southwest Airlines (NYSE :), Delta Air Lines (NYSE :), United Airlines (NASDAQ :), and American Airlines (NASDAQ: {{44412 | AAL).
Healthcare: BioTech, Big Pharma to Enjoy COVID Boost
Expected growth in earnings per share in the fourth quarter: + 6.6% year-on-year
Expected revenue growth in the fourth quarter: + 10% on an annual basis
The healthcare industry will be backed up by the race to deliver successful COVID-19 vaccines and treatments as the second-highest year-over-year profit growth of all eleven industries is expected to be reported. Earnings per share are expected to increase by 6.6% compared to a year earlier.
Five of the six sub-industries in the sector are expected to generate higher revenues than a year ago. The Biotechnology sector expects a double-digit increase of 15%. Earnings per share growth for the quarter is also expected from the Pharmaceuticals segment, with earnings growth of nearly 13% year-on-year.
The industry is also expected to report the highest annual revenue growth of all eleven industries, at +10.0%. Five of the six sub-industries in the sector are expected to report sales growth, led by double digit gains in the Life Sciences Tools & Services group (+ 22%) and Biotechnology (+ 20%).
The Health Care Select Sector SPDR® Fund (NYSE :), the industry's leading ETF, is trading near record highs and is up nearly 14% over the past 12 months.
More impressively, the iShares Nasdaq Biotechnology ETF (NASDAQ 🙂 – which tracks the top biotechnology and pharmaceutical companies on the list – is up more than 31% in the past year.
At an enterprise level, Moderna (NASDAQ 🙂 and Abbott Laboratories (NYSE 🙂 are two to keep an eye on. MRNA, which has developed a vaccine against COVID-19, is expected to achieve sales of $ 293.2 million, up nearly 2,000% from $ 14.1 million a year ago, while ABT expects sales of $ 9 .94 billion, which is better than last year's $ 8.31. billion read.
