Is 3Q Earnings Season the Start of the Turnaround?

Written by: Gary Ashton

Earnings season kicks off this week.

Things gear up on Tuesday when JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and BlackRock (NYSE: BLK) report their 3Q results, followed by Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Goldman Sachs (NYSE: GS) on Wednesday. Morgan Stanley (NYSE: MS) reports on Thursday. Outside of the financial sector, results from Johnson & Johnson (NYSE: JNJ), Delta Air Lines (NYSE: DAL), United Air Lines (NASDAQ: UAL), and UnitedHealth Group (NYSE: UNH) are also on tap. Many analysts and investors believe the third quarter will mark the start of a turnaround in US corporate earnings and will be watching results very closely.

Are investors and analysts jumping the gun by expecting upbeat corporate earnings? Many investors anticipate that companies' profits in the S&P500 equity index will be better in 3Q than in 2Q when earnings collapsed the most since the great financial crisis of 2008. Several companies are still struggling to come out of the Covid-19 turmoil, but many investors believe the June quarter was the low, and even if 3Q earnings are negative, they will likely be less negative than in June.

Out of the 30 Mega and Large-cap names due to report next week, Finscreener.com shows that 18 have an earnings rating of either buy or a strong buy, while only seven have an earnings rating of sell or strong sell. Unsurprisingly, transportation continues to remain under pressure, with both Delta Airlines and United Air Lines retaining strong sell ratings. For 3Q20, analysts expect United to post a loss of $7.66 per share, which is a downward revision of nearly 30% in the last 90-days. For Delta Airlines, analysts anticipate a loss of just over $3 per share in 3Q, a 41.31% downward revision from 90-days ago. (For more, see: Is Delta Air Lines Drowning in Debt?)

On the flip side from the beaten-down transportation sector, analysts believe US Banks will do well in 3Q. Finscreener.com has strong buy earnings ratings on JP Morgan, Bank of America, Citi, Goldman Sachs, and Morgan Stanley. Analysts anticipate Morgan Stanley will report earnings of $1.18 per share, an 18% upward revision in the last 90-days. They also expect Goldman Sachs to report $4.90 per share, which marks a 24.68% upward revision in the previous 90-days.

In the meantime, US companies are doing what they can to shore up liquidity and stay cash-rich should the bad times return or worsen. For example, US companies have issued a record $1.48 trillion of corporate bonds in 2020, according to data provided by Dealogic. That amount of debt shattered the previous record of $928.8 billion issued in the same period in 2017. Thanks to the US Federal Reserve Bank cutting interest rates, borrowing costs are at generational lows. Companies are doing what they must to survive the slump in business and hang on for better times.

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