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US businesses have jumped low profit hurdle in coronavirus-hit quarter

A record-high percentage of US businesses are beating analysts’ financial reports this earnings season, giving investors a flicker of hope in what is still predicted to be the toughest period for profit since the financial crisis.

Over halfway into second-quarter earnings, 82.1 per cent of reporting firms have exceeded profit estimates, which will be the highest in Refinitiv IBES data history since 1994.

What’s more, the size of the beats is far above what is normal. Based on Refinitiv data as of Friday, S&P 500 companies have beaten earnings forecasts by a staggering 21.7 per cent, which is also set to be the highest on record since 1994.

The most recent big boost to figures arrived late last week, when results from Facebook and trillion-dollar market cap companies Apple, Amazon.com and Google parent Alphabet outperformed expectations.

Estimates had been so significantly reduced in many cases ahead of earnings season that they were easier to beat, strategists reported. Nevertheless, the results reinforce the case for investors betting that the impact of coronavirus-led lockdowns and layoffs on the bottom lines of companies may not be as adverse as previously thought.

“What it’s suggesting is there are pockets of absolute power in corporate America,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

In fact, tech results in particular show “there is spending going on globally,” she said.

Since results began in mid-July, the S&P 500 is up almost 4 per cent, placing it 3.4 per cent from its February record high close.

To be sure, the rate of the market’s turnaround off the March lows has eased in recent weeks, with profits coming in as the United States sees a revival of virus cases in many places and economic figures remain grim.

S&P 500 earnings in the second-quarter – forecast to plunge 33.8 per cent from a year earlier – are already likely this years low point of earnings and the most significant quarterly drop since the financial crisis.

Data on Thursday revealed an increase in jobless claims last week, while in the second quarter the economy suffered its most substantial blow on record.

In a recent report, strategists at BofA Global Research wrote that while margins are “tracking a hair above expectations,” they are still projected to crash, and comments from companies indicate further job cuts ahead.

Still, for the second quarter, some businesses handled results better than expected.

Investors were particularly keen to learn S&P 500 earnings from technology firms, the most heavily weighted sector.

With financial results in so far from 36 of the 71 tech companies in the S&P 500, second-quarter earnings for the S&P 500 tech sector are now seen rising 1.4 per cent from last year against an 8 per cent fall estimated on Jul 1, Refinitiv’s data shows.

Since Jul 1, due to strong results from the UnitedHealth Group, drug manufacturers like Pfizer and others, the S&P ‘s healthcare index has also seen significant gains. According to Refinitiv, analysts now expect healthcare profits to have risen by 1.1 per cent relative to a 15.1 per cent decrease scheduled at the start of July.

“The second quarter of 2020 was a quarter with more volatility in it than I have ever seen in my career. Managements, for the most part, suspended guidance, so had the world kind of flying blind as to what the second quarter would bring,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

And, “results have been delivered that are usually better than the worst conceivable … Things are a little bit more optimistic than many people assumed.”

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