Sometimes, it’s all about expectations
The Q2 2020 earnings season saw a historic 83% of S&P 500 companies surpassing lowered expectations despite a 30% year-on-year earnings decline—the worst since 2009—highlighting a significant disconnect between Wall Street’s pessimistic outlook and actual economic performance, which has contributed to a recent rally in US equities and bolstered predictions of President Trump's reelection.
Sometimes in life, it’s not so much what you do, it’s what you do relative to what the world expects of you. For example, in the movie Dumb & Dumber, Lloyd Christmas totally redeems himself in the eyes of Harry Dunne when he trades their van “straight up, to a kid in town” for a moped that gets 70 miles per gallon. The same dynamic applies to Wall Street, especially when it comes to how corporate earnings compare to what investors expected.
A case in point is the Q2 2020 earnings season. It has been a challenging season for the companies that make up the S&P 500 Index, with earnings down 30% year-on-year—the worst since Q1 2009, during the Great Recession. While a 30% drop in earnings is significant, expectations were even lower as Q2 earnings season began. In fact, with 499 of the S&P 500 companies having reported quarterly earnings results, 83% have topped expectations. This is the highest percentage on record, dating back to 1994, and well above the long-term average of 65%.
That quarterly performance relative to investors’ expectations—and what it reveals about the disconnect between Wall Street’s outlook and the actual performance of the economy—are important and legitimate catalysts for the dramatic rally in US equities over the past several months. Finally, with the S&P 500 Index up 1.41% since August 3, the Election Countdown Calculator is indicating President Trump will win reelection come November 3.