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The COVID-19 earnings recession is expected to remain, but an end may be in sight

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After the holiday quarter last year snapped an earnings recession, the same is not expected this year — but it isn’t impossible, and may happen three months late.

Quarterly profits for the S&P 500
SPX,
-0.72%

are expected to drop as fourth-quarter results roll in during the coming weeks, after declining in each of the first three quarters of 2020. Analysts predict an upswing throughout 2021, though, as well as fourth-quarter numbers that beat their average expectations.

CFRA Chief Investment Strategist Sam Stovall told MarketWatch that beating expectations for fourth-quarter numbers would be in line with historical patterns. Earnings topped expectations for more than 30 quarters in a row before the first quarter of 2020, he said, when the pandemic first took a toll on corporate results. An overall earnings beat this quarter would help extend a new string of beats to three in a row.

One key question for FactSet analyst John Butters is whether earnings could ultimately end up in positive territory for the quarter, even as estimates call for an aggregate 6.8% drop. Based solely on the historical five-year trend, it wouldn’t seem likely, but companies posted much stronger beats over the past two quarters, meaning an end to the earnings recession could be a possibility. The few fourth-quarter reports that have come in so far have exceeded earnings expectations by about 26.2% on average, Butters wrote.

What you need to know to prepare for earnings season: Expect another quarter of big earnings beats

The pandemic has had an unequal impact on businesses, with digital giants like Amazon.com Inc.
AMZN,
-0.74%

and Zoom Video Communications Inc.
ZM,
+0.34%

benefiting from an increasingly remote world while categories like leisure, hospitality and restaurants struggle. Cruise lines, hotels and airlines are expected to see huge negative swings in earnings compared with a year earlier, helping to drag down the S&P 500.

The energy sector is expected to be the biggest loser for the fourth quarter, with analysts surveyed by FactSet modeling a 101% decline.

“The causes of the decline are broad, in our view, across both upstream and downstream portions of the energy value chain,” CFRA analysts wrote.

West Texas Intermediate
CL00,
-0.92%
,
the benchmark for U.S. crude oil, saw an average price of $40 a barrel during the quarter, 29% lower than a year prior, the analysts noted: “Getting almost 30% less for one’s product certainly hurts, and with about two out of every three barrels of oil equivalent consisting of liquids (such as crude), that price decline was a major contributor.”

Only four sectors are expected to deliver positive earnings momentum in the quarter, according to FactSet, led by materials with projected growth of 8%. Within that sector, the metals and mining category, as well as industrial gases, could be strong performers, the CFRA analysts said.

The other sectors projected to show positive growth are consumer staples, health care, and information technology, per FactSet.

Earnings season kicks off in earnest in the week ahead, with 40 members of the S&P 500 set to report along with six Dow Jones Industrial Average
DJIA,
-0.57%

components. Highlights include Netflix Inc.
NFLX,
-0.58%
,
United Airlines Holdings Inc.
UAL,
-5.18%
,
and Intel Corp.
INTC,
-2.82%

Here’s what to watch for in the week ahead.

Bank on it

Look for a steady stream of bank earnings, led by Bank of America Corp.
BAC,
-2.88%

and Goldman Sachs Group Inc.
GS,
-2.23%

on Tuesday morning, with Morgan Stanley
MS,
-1.61%

follows a day later. Citigroup Inc.
C,
-6.93%

and Wells Fargo & Co.
WFC,
-7.80%

began the financials parade Friday, and both showed better profit than expected with disappointing revenue results.

Bank stocks have outperformed the S&P 500 since the end of September.

“A positive narrative has emerged: faster economic growth and expansionary fiscal policy drive rising net interest income (NII) and falling credit costs, while the resumption of share buybacks further boosts profitability and EPS,” UBS analyst Saul Martinez wrote in a note to clients, though he’s proceeding a bit more cautiously on the sector. Among Martinez’s concerns is that “mortgage income should come down to earth from elevated 2020 levels.”

Press play

Netflix had a red-hot first half of 2020 but struggled to live up to that momentum in the third quarter. The company will try to get back on track when it reports fourth-quarter results, which will show how popular shows like “The Queen’s Gambit” and a new season of “The Crown” impacted subscriber trends.

Full preview: Netflix may struggle for a successful sequel to early pandemic subscriber rush

Another key area to monitor is the impact of price hikes on churn levels. The company raised prices in the U.S. and Canada during the fourth quarter and “evidence is growing that we will see widespread pricing increases in 2021,” according to Bernstein analyst Todd Juenger.

Netflix reports results Tuesday afternoon.

End of an era

Intel is headed in a new direction after recently tapping VMware Inc.
VMW,
-0.55%

Chief Executive Pat Gelsinger to take over its top role beginning in mid-February. But investors will hear one last time from the old guard when the chip giant holds its Thursday afternoon earnings call.

For more: Can Intel’s ‘boy wonder’ pull a Steve Jobs?

While the call may not shed light on the new vision for Intel, the company noted in a press release announcing Gelsinger’s appointment that it has made “strong progress on its 7-nanometer process technology and plans on providing an update” in conjunction with earnings. Intel also disclosed that it expected its fourth-quarter earnings and revenue to exceed the company’s prior outlook.

Intel has struggled in recent years from a series of technological missteps and will be looking to get back on track in 2021.

Slow ascent

Domestic travel picked up in the fourth quarter, especially around the holidays, but United Airlines and the rest of the airline industry still face plenty of pain ahead. Cowen & Co. analyst Helane Becker predicts that first-quarter revenue for the industry could be down 45% from levels seen in the first quarter of 2019, given depressed fares and a slower-than-anticipated vaccine rollout. United will offer its perspective on the situation with its Wednesday afternoon report and Thursday morning earnings call.

A slice of the Dow

Six Dow Jones Industrial Average components are on the docket, beginning with Goldman Sachs on Tuesday morning and then Procter & Gamble Co.
PG,
-0.75%

and UnitedHealth Group Inc.
UNH,
+0.22%

on Wednesday morning. Travelers Cos. Inc.
TRV,
+0.65%

kicks off the Thursday morning slate, while Intel and International Business Machines Corp.
IBM,
-0.45%

round out the day after the closing bell.

IBM could share more about an sales reorganization going on at the company as it tries to simplify the customer experience. “This move will inherently enable IBM to more deeply penetrate their customer base and increase their wallet share,” Evercore ISI analyst Amit Daryanani wrote in a recent note to clients.

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