Excluding Just Three Industries, S&P 500 Would Be Reporting Earnings Growth of 4% for Q3

The S&P 500 is reporting a year-over-year decline in earnings of -6.3% for the third quarter. There are 63 industries within the S&P 500. Of these 63 industries, 27 are reporting a year-over-year decline in earnings for the third quarter. However, 36 are reporting year-over-year growth in earnings for the third quarter. The industries reporting the largest (year-over-year) dollar-level increases in earnings for the third quarter are the Interactive Media & Services (+$5.2 billion), Software (+$4.1 billion), and Automobiles (+$2.8 billion) industries.

Given that more industries are reporting year-over-year growth in earnings than year-over-year declines in earnings, what is driving the year-over-year earnings decline of -6.3% for the entire index?

Industries Reporting Earnings Declines

The index is reporting a year-over-year decline in earnings because three industries are reporting unusually large year-over-year declines in earnings for the quarter. These three industries are the Oil, Gas, & Consumable Fuels industry, the Airlines industry, and the Hotels, Restaurants, & Leisure industry. All three industries have seen significant negative impacts to revenues and earnings due to COVID-19.

The Oil, Gas, & Consumable Fuels industry is reporting the largest (year-over-year) decline on a dollar-level basis (-$14.3 billion) and the third-largest (year-over-year) decline on a percentage basis (-113%) of all 63 industries. The Airlines industry is reporting the second-largest (year-over-year) decline on a dollar-level basis (-$13.0 billion) and the largest (year-over-year) decline on a percentage basis (-313%) of all 63 industries. The Hotels, Restaurants, & Leisure industry is reporting the third-largest (year-over-year) decline on a dollar-level basis (-$9.7 billion) and the second-largest (year-over-year) decline on a percentage basis (-133%) of all 63 industries.

These three industries are the largest contributors at the industry level to the year-over-year earnings decline for the S&P 500 as a whole. Combined, these three industries are reporting a larger decline in earnings (-$37.1 billion) than the aggregate earnings decline for the entire S&P 500 (-$22.7 billion). As a result, if these three industries were excluded, the S&P 500 would be reporting year-over-year growth in earnings of 4.3% instead of a year-over-year decline in earnings of -6.3%.

One sector that exemplifies the outsized impact on earnings growth of just one of these three industries is the Consumer Discretionary sector. Overall, the Consumer Discretionary sector is reporting a year-over-year decline in earnings of -4.2% for the third quarter. However, only three of the 10 industries in this sector are reporting a year-over-year decline in earnings, led by the Hotels, Restaurants, & Leisure industry. The other seven industries in this sector are reporting double-digit (year-over-year) earnings growth, led by the Automobiles (74%), Multiline Retail (65%), and Internet & Direct Marketing Retail (45%) industries. If the Hotels, Restaurants, & Leisure industry were excluded, the Consumer Discretionary sector would be reporting year-over-year earnings growth of 36.0% for the third quarter rather than a year-over-year decline in earnings of -4.2%.

Outlook for the Fourth Quarter and Beyond

Looking ahead to the fourth quarter, these three industries are again predicted to have the largest year-over-year declines in earnings on a dollar-level basis and on a percentage basis. These three industries are also expected to be the largest contributors to the year-over-year decline in earnings for the entire index for the quarter. As of today, the S&P 500 is projected to report a year-over-year decline in earnings of -10.6% in the fourth quarter. If the Oil, Gas, & Consumable Fuels, Airlines, and Hotels, Restaurants, & Leisure industries were excluded, the estimated year-over-year decline for the S&P 500 for Q4 would decrease to -3.2% from -10.6%.

However, it is interesting to note that analysts believe all three industries will see year-over-year improvements in dollar-level earnings in 2021 relative to 2020. Because of the expected losses in 2020 for all three industries, year-over-year growth rates for 2021 can’t be calculated on a percentage basis. On a dollar-level basis, the Oil, Gas, & Consumable Fuels industry is projected to report a $24.9 billion year-over-year increase in earnings in 2021 relative to 2020. The Airlines industry is projected to report a $26.1 billion year-over-year increase in earnings in 2021 relative to 2020 (though the industry is still projected to report an overall loss in 2021). The Hotels, Restaurants, & Leisure industry is projected to report a $15.5 billion year-over-year increase in earnings in 2021 relative to 2020.

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