Last Quarter Could've Been Worse

Last Quarter Could've Been Worse

over 3 years ago3 mins

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Most big US companies have now told investors how last quarter went for them – and it wasn’t as bad as they thought.

⏰ Recap

  • Heading into US second-quarter “earnings season”, analysts expected company profits to be 44% lower than the same time last year
  • Big banks raised the curtain by reporting largely stronger-than-expected updates
  • And after announcements from Netflix and Microsoft initially worried investors, tech giants Amazon, Facebook, Apple, and Alphabet quickly calmed their nerves
  • But investors in oil companies weren’t quite so lucky: several of the biggest made huge losses last quarter

✍️ Connecting The Dots

Company management teams are incentivized to underpromise and overdeliver – and that’s no truer than in the middle of a pandemic, which gave firms a reason to lower expectations even more than they usually would. Even taking that into account, investors didn’t expect 66% of companies to announce better-than-expected second-quarter revenues, or 85% of them to announce higher-than-expected profits. That much was clear from the stocks' average rise within a day of their updates.

Some of last quarter’s highest earnings growth unexpectedly came from discretionary sectors: sellers of things people want but don’t necessarily need. Those might’ve benefited from consumers who picked up new pursuits during the lockdown. Utilities were, as predicted, up there in terms of earnings growth, as were the healthcare and real estate industries. And that’s meant that, overall, analysts have started to raise their earnings estimates for this quarter. Not all sectors have been so lucky, mind you: oil companies suffered some of their biggest losses on record thanks to a historic drop in oil’s price.

Despite a second-quarter that by all accounts could’ve been worse, only 20% of the big companies that usually tell investors what to expect in the next year decided to do so. In other words, the future’s still pretty uncertain. Take Apple, for example: the tech giant chose not to give its usual quarterly steer – and to make matters worse, it also said it’d be delaying its upcoming iPhone launch by a few weeks.

🥡 Takeaways

Stocks only rose 0.22% on average the day after their (mostly better-than-expected) earnings updates, which could be for a couple of reasons. One is the difference between analysts’ official forecasts and investors’ expectations: the former tends to move more slowly than the latter, seeing as investors can quickly buy up shares as soon as their views change. So by the time a company makes an announcement, its stock price has already risen to reflect the good news and then doesn’t move much higher. The other reason: what might've been a meteoric rise as new investors buy into the stock is balanced out by existing investors who sell to lock in their profits.

Another feature of the last quarter was an increase in mergers and acquisitions. That makes sense: companies that have come out of this pandemic in a relatively strong position are taking the opportunity to buy weaker rivals or complementary add-ons, while others are hoping that if they combine forces, they’ll be resilient enough to weather the ongoing storm.

🎯 Also On Our Radar

Last week, private equity powerhouse Blackstone announced the $5 billion purchase of family tracing business, highlighting the increasing relevance of “big data” in the investing landscape. That could have implications far and wide: Ancestry’s DNA insights, for instance, may have implications for how medical treatments are administered – and even for how much you’re charged for health insurance.

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