The fourth quarter earnings season is currently underway, which for most companies closes the full year financial performance for 2020. The covid-19 pandemic has shaped the full year outcome of all companies: pushing forward and accelerating trends such as the digital economy and green initiatives while putting pressure on other industries, particularly those sensitive to the lockdown measures such as travel and leisure.

More US companies have so far reported earnings results when compared to Europe. In fact, 60% of companies listed on the S&P 500 Index have already announced their earnings update, compared to 30% of companies listed on the Euro Stoxx 600 index. Nevertheless, the current earnings season presents further insight to measure the progress of the economic recovery from a bottom up perspective.

In the US, despite that earnings expectations moved higher, almost 75% of companies that have reported posted a positive sales surprise relative to expectations. Furthermore, 80% of S&P 500 listed companies that have released their earnings managed to beat earnings expectations. In aggregate, sales were 3.6% higher than expected, whereas earnings grew close to 7%, and 19% higher than expected.

On a sector level, earnings growth was recorded across all sectors except for the industrials sector, which was weighed down by the performance of transportation companies particularly, US airlines which are in loss making territory. Even so, American Airlines Group and Southwest Airlines managed to record better than expected bottom line results, while Delta Air Lines announced sales that were slightly better than analysts’ estimates. Meanwhile, the strongest earnings surprises were recorded by the consumer discretionary, financials and materials sectors, which recorded a strong profitability increase over the quarter.

In contrast, the earnings momentum in Europe, witnessed in third quarter earnings season, seems to have weakened. The negative impact of regional lockdowns is reflected in the aggregate earnings and sales results for the fourth quarter, down by double digits and lower than expectations. Underlying sector results, however, presents a mixed picture. Industrials and consumer staples sectors managed to record better earnings than expected, despite a top line reduction, while the strongest positive earnings surprise across European companies was achieved by the financial sector, with banks among the strong performers. Meanwhile, the utilities sector represents the sharpest sales contraction on the quarter, so far.

Two consistencies have emerged across both regions in this earnings season. The energy sector is a clear laggard in both Europe and the US, with sales falling more than 30% and the majority of companies recording earnings decline for the quarter. On the other hand, the information technology is a common winner, recording the only sales growth in Europe and the third highest sales growth in the US, improving margins and beating market expectations across both regions.

The digital side of the economy has not only managed to navigate the pandemic but has come out on top. The faster adoption of a digitalised economy is captured in the financial performance of large multinational such as ASML, Amazon, Alphabet, and Microsoft. Last week, Amazon surprised to the upside, with a fourth quarter earnings almost double what analysts were expecting and revenue up 44% higher than the prior year whereas Alphabet benefitted from stronger than expected digital advertisements.

As things stand, the outperformance of US earnings season compared to Europe reflects the underlying macroeconomic fundamentals and how the pandemic is evolving across both regions. Ultimately, the earnings growth potential of an individual company not only depends on the strength of its business model but also relies on the strength of the underlying economy in which the company operates.

In line with the global economic forecasts, which stand higher for US compared to Europe, earnings expectations for companies in the US have continued to increase. According to FactSet, first quarter earnings estimates for US climbed 3.2% higher. This is the strongest increase in earnings expectations since the start of the pandemic and the upward revision in estimates is the highest for the energy, financial and information technology sectors.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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