Spotlight on US equities as Q3 earnings season kicks off - Capital Economics
Capital Daily

Spotlight on US equities as Q3 earnings season kicks off

Capital Daily
Written by Simona Gambarini
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While the S&P 500 is now ~5% above its pre-pandemic level, we don’t think that this reflects excessive optimism among investors. One way to see this is to take a close look at analysts’ expectations for earnings as the Q3 earnings season in the US kicks off this week.

  • We expect consumer prices in China fell due to lower food prices (02.30 BST)
  • US jobless claims likely to show elevated level of layoffs (13.30 BST)
  • Track the spread of COVID-19 and its economic and market impact here

Key Market Themes

While the S&P 500 is now ~5% above its pre-pandemic level, we don’t think that this reflects excessive optimism among investors. One way to see this is to take a close look at analysts’ expectations for earnings as the Q3 earnings season in the US kicks off this week.

Some commentators have argued that the recent strength of the S&P 500 is a sign that markets have become complacent about the outlook for the US economy. But expectations for S&P 500 companies’ future earnings are not particularly upbeat. In fact, according to the latest set of estimates published by S&P Dow Jones Indices, analysts forecast that the EPS of firms in the S&P 500 will be ~20% lower in Q3 2020 than in Q4 2019. As economic activity continues to recover, EPS are also expected to bounce back, but only to return to their pre-crisis levels by mid-2021. (See Chart 1.)

Chart 1: S&P 500’s Earnings Per Share
(US$; Forecast = Analysts’ Consensus)

Sources: S&P Dow Jones Indices, Capital Economics

It is also worth remembering that, compared to the US economy, sectors like information technology, communication services and healthcare, which have fared relatively well during the pandemic, are massively overrepresented in the index. (See Chart 2.) By contrast, firms in sectors like energy and financials, which have been hit really hard by the crisis, have a much smaller weight. And analysts project that earnings in those sectors will not have regained their 2019 levels by the end of 2021.

Chart 2: S&P 500’s Change In EPS From 2019 To 2021 Implied By Analysts’ Expectations (%)

Sources: S&P Dow Jones Indices, Capital Economics

Admittedly, the recent resurgence of COVID-19 cases in parts of the US and much of Europe poses a key downside risk to our projections for both the global economy and equity markets. But the US already experienced a major second wave earlier in the summer that didn’t send the economic recovery into reverse. And as we argue here, extensive monetary and fiscal support has now been put in place to limit the damage from the pandemic. The belief that policymakers will do whatever it takes is likely to continue to underpin the markets, even though the US is currently struggling to agree on further fiscal support.

There are also two key upside risks to our forecast for the US economy. The first is that an effective vaccine becomes widely available in early 2021. The second is that whoever wins the US presidential election pushes through a large fiscal stimulus.

With all this in mind, the strength of the S&P 500 is not as surprising as it may first appear. And assuming that the virus outbreak is slowly brought under control in the coming months, and economic activity continues to recover, we think that many coronavirus-vulnerable sectors will eventually recoup more lost ground. (Simona Gambarini)

Selected Data & Events




CE Forecast*

Thu 15th


Producer Prices (Sep.)






Consumer Prices (Sep.)





*m/m(y/y) unless otherwise stated; p = provisional

Key Data & Events


The 0.4% m/m increase in producer prices in September suggests that inflationary pressures remain a little stronger than yesterday’s CPI figures implied, but the big picture is still that the annual PPI inflation rate remains very subdued.

On Thursday, the initial jobless claims data will probably suggest that layoffs remain unusually elevated, but we are increasingly sceptical that they are providing an accurate gauge of labour market conditions, with other indicators painting a far less downbeat picture. Otherwise, the Empire State and Philly Fed surveys are likely to indicate that manufacturing output has continued to expand at a reasonably solid pace in October. (Andrew Hunter)


August’s 0.7% m/m increase in euro-zone industrial production indicates that the recovery in euro-zone industrial output has slowed but is not reversing. Although August had the smallest monthly increase since lockdowns ended, no growth in September production would still result in a q/q increase of about 16% in Q3 as a whole and contribute close to three percentage points to GDP.

In the UK, the placement of tighter restrictions across broad swathes of the country would strengthen our conviction that GDP will stagnate over the next few months. A two-week national lockdown at some point could reduce the level of GDP by 5% and set back the economic recovery by a year. (See here.) (Melanie Debono & Thomas Pugh)


Broad credit growth hit its highest level in nearly three years in September, due to a pick-up in shadow lending and direct financing. While net new lending is likely to slow in the coming months due to tighter quantitative controls on bank lending, improving sentiment is boosting the appetite for bond and equity issuance among private firms. On balance, we think new lending should remain strong enough to keep growth in outstanding credit rising until the turn of the year.

We think data released on Thursday will show that consumer price inflation eased in September, largely due to a decline in food price inflation related to the sharp decline in pork prices last month. Meanwhile, weekly producer price data and the output price components of the PMIs suggest that producer prices picked up last month thanks to the ongoing improvement in economic activity. (Sheana Yue)

Other Emerging Markets

In Emerging Asia, the Monetary Authority of Singapore (MAS) left policy on hold as advanced GDP data showed that the economy rebounded well in Q3. However, with GDP still far below its pre-crisis level, the MAS is likely to maintain its accommodative stance for at least the next year. Meanwhile, The Bank of Korea (BoK) left its main policy rate on hold at 0.50% and, with the economic recovery holding up relatively well, further rate cuts now seem unlikely.

In Emerging Europe, we think that Russia’s industrial sector gained only a bit of momentum in September, with the annual pace of contraction in output likely to have eased from 7.2% y/y in August to 6.4% y/y last month.

In Sub-Saharan Africa, hard activity data from South Africa released this week point to continued weakness in the economic recovery in August despite the easing of containment measures, with manufacturing production was still down 10.8% y/y in August. More recent survey data suggest no major turnaround in September either. (Alex Holmes, Jason Tuvey & Virág Fórizs)

Published at 16.25 BST 14th October 2020.

Editor: John Higgins

Enquiries: Oliver Byrne