Key Points
- Equity prices have remained on an upward trajectory despite the ongoing global pandemic.
- The BDO team conducted a study analyzing more than 20,000 equity analyst estimates for 428 public companies across 24 industries to understand the impact of COVID-19.
- There is a significant disconnect between the expected impact of the pandemic on revenues and profits and the performance of equity markets.
- Different industries are experiencing varying degrees of impact and recovery timelines.
- Analyst estimates and market performance show a disconnect, with some industries outperforming and others underperforming relative to expectations.
- The magnitude and rate of downward revisions in analysts’ estimates in May provide some hope that COVID-19 considerations have been fully incorporated into forward estimates.
As the effects of the global pandemic continue to unfold, business owners and investors are facing the challenge of assessing the economic impact and planning for an uncertain future.
The 2020 inaugural issue of “The Path Ahead, Analysis of Analyst Estimates for Insights on the Economic Recovery” by BDO looked at more than 20,000 equity analyst estimates for 428 public companies across 24 industries, providing valuable insight into the evolving landscape amid the COVID-19 pandemic.
While the short-term impacts of COVID-19 are widely understood, there are differing opinions on the duration and shape of the eventual recovery. Many anticipate a U-shaped upturn, which seems to align with the rise in equity prices. However, the data suggests a more severe and prolonged degradation in revenues and profits.
According to the analysis, there are clear sector differences in the near-term effects and the timing and depth of recovery. The study also revealed that while declines in expected revenues and profits for specific industries are expected, the magnitude and long-term ramifications, as conveyed by analyst estimates, are severe.
Despite the widespread decline in forecasted fundamentals, equity markets have moved in a different direction. The discrepancy between market performance and analyst estimates is evident across different industries.
The team also analyzed the relative market performance for each industry, highlighting the disparity between market value and analyst estimates. Some industries have seen a better market performance than expected, while others have underperformed relative to estimates.
Within the airline industry, the market values have plunged, reflecting the short-term impact of the pandemic. However, the long-term estimates suggest a V-shaped earnings recovery, indicating that investors are focusing on the near-term challenges. Similar discrepancies were observed in the insurance industry, where long-term EBIT estimate declines implied significantly better relative market performance.
In contrast, the retail – discretionary and luxury sectors have not experienced as significant a drop in market values compared to earnings estimates in other sectors. The online retail and medical device sectors have also outperformed expectations based on the downward revisions from pre- to post-COVID-19 2020 EBIT estimates.
Analyst estimates continued to deteriorate from March to May, while stock prices often moved in the opposite direction. However, in May, trends suggested that the downward revisions may have hit bottom, providing some hope that COVID-19 considerations have been fully incorporated into forward estimates.
In the next quarterly study, BDO will analyze data through August 31 and explore whether analyst estimates will align with market values, or if the disconnect between fundamentals and market value will persist.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images / Eloy-CM
