By Roman Chuyan, CFA

  • Operating earnings for the first quarter are expected to decline by 16%
  • This is the biggest decline in the S&P 500 earnings since 2009
  • The price-to-earnings ratio for the S&P 500 is back at 19.2, its average level in 2019

Earnings reporting for the first quarter of 2020 is now underway, with 24% of companies included in the S&P 500 index reporting their results. In this article, I provide an overview of how earnings are trending so far. The numbers below are a blend of actual and estimated results. Of course, actual results are often different from estimates, so I will publish the final review when the earnings season is complete – please bookmark and revisit our ETF Strategist page for that, and other articles.

Blended operating earnings for the quarter are declining by 15.8% year-over-year. This is the largest drop since Q2-2009 (-26.9%). The halt in travel and widespread coronavirus-related lockdowns in March are the primary reason for the decline. Other factors include the crash in oil and other commodity prices that hit the Energy and Materials sectors hard. However, earnings had already been far from stellar – the drop comes after four consecutive quarters of flat-to-negative growth (see chart above). The operating price-to-earnings ratio for the S&P 500 is back at 19.2, its average level in 2019.

There’s a sharp divide between “bad” and “Ok” sectors this quarter – and there are no “good” ones. Six “Ok” sectors exhibit low single-digit growth, led by the Telecoms (+5.5%, see chart above). Five “bad” sectors are experiencing large losses, with Energy (-67%), Consumer Discretionary (-42%), and the Financials (-42%) demonstrating the largest percentage declines from the same quarter last year.

Source: Factset

The above chart from Factset is a good way to look at market valuation relative to expected 12-month earnings. After falling to an undervalued area briefly, the rebound in the S&P 500 index combined with the drop in EPS again suggests that stocks are significantly overvalued. 

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