Click HERE to access the FSInsight COVID-19 Daily Chartbook.
STRATEGY: 3Q2020 EPS is proving we are past the earnings nadir
Equity markets were choppy over the past week, impacted by the stalemate in Washington over the fiscal stimulus and hurt by the surging COVID-19 cases in Europe and the US. It was not all bad news for COVID-19 as the severity of this wave of cases seems less lethal than prior waves (the US seeing 1% incremental hospitalizations vs 4% in July). And as is apparent, over the next 20 days, equity markets are primarily focused on Washington (outcome + fiscal) and focus on the COVID-19 path (worse). So, the chop is understandable, but we also think stocks have made their pre-election lows.
But the economic news continues to show decent vigor. Look at the Philly Fed index today, reaching 32. This is the best number since really 2018 and builds upon 4 months of expansionary readings previously. This survey result is affirmation the US economy has moved past its nadir and is sequentially building momentum.
Source: Bloomberg
And 3Q2020 EPS seasons seem to be affirming we are indeed moving past the bottom on EPS. A simple guide to seeing this is to look at the relationship between ISM exports and EPS growth. And as you can see below, when ISM exports recover back above 50, this coincides with a turning point for EPS. Hence, the run-rate for EPS is now positive Q/Q.
– this is far stronger than we expected, as we expected 3Q2020 EPS to be similarly depressed.
– so US corporates are more “unkillable” than even we expected.
– previously, we expected 3Q2020 EPS to be similarly bad to 2Q2020, so this is better than our expectations
– we are raising our 2020 EPS to $100 from $50 previously to reflect this, but keep 2021 at $193
Of course, the key to sustaining this momentum is for the US economy to remain stable without the risk of a new set of lockdowns. Unfortunately, COVID-19 is spreading at a faster rate in the US. While cases are spreading in nearly every state, this surge seen since early September is really coming from a new set of states. This is essentially the wave 3 of cases fueled by 20-ish states (wave 1 was NY tristate, wave 2 was FL, CA, AZ, TX, or F-CAT). And as the chart below shows, we can see the large contribution to wave 3 from these 20-ish states.
– daily cases are spreading at such a high-speed in these states to hopefully cause their residents to take appropriate action
– we believe it is possible to see this peak within the next 2 weeks, similar to wave 1 and wave 2
– and if these 20-ish states avoid a shutdown, this would be good news for continued EPS momentum.
Source: COVID-19 Tracking and Fundstrat
POINT 1: COVID-19 cases rising but 7D delta is not accelerating
The latest COVID-19 daily cases came in at 62,363, a pretty sizable figure and up +8,906 vs 7D ago. This is not quite as large as the 10,382 7D delta 5 days ago, but it is still a large increase nevertheless.
Source: COVID-19 Tracking Project and Fundstrat
US daily cases 7D delta is up but not exponential…
Again, the daily change vs 7D ago, in our view, is the leading indicator as it is what influences the 7D moving average.
– As you can see below, the 7D delta in daily cases is rising but at a much slower pace
– This is not exponential.
– Exponential would be a continued and an increasingly faster rise in cases
– It has not yet happened, but it could
Source: COVID-19 Tracking and Fundstrat
Source: COVID-19 Tracking and Fundstrat
POINT 2: 9 states (or 22) in wave representing 7% of US account for ~20% of cases
Yesterday, we wrote how this third wave of US COVID-19 cases was being driven by a group of 22-ish states which have previously seen low case prevalence. The two earlier waves of cases were NY tristate (Feb-Apr) and FL, CA, AZ, TX, or F-CAT (June-July) and this third wave is underway.
Wave 1 (Feb-April 2020) –> NY tristate + MA + RI
Wave 2 (June-July 2020) –> FL, CA, AZ, TX, or F-CAT
Wave 3 (now) –> 22 states facing outbreak
The spread of COVID-19 is unpredictable in that there is not a consistent R0. In fact, that large-scale from India (of >800,000 contact traced) showed that the R0 varies and 72% of infected having an R0 of 0 (they infect nobody) but for ~8%, the R0 is >10 and these are the superspreaders.
Looking at “peak speed” of COVID-19 spread by states…
From a community/state perspective, this spread also seems to have a built-in “speed governor,” in the sense that once cases reach a certain level of spread, there is a policy response as well as behavioral changes. A simple example of this is the many anecdotes we received from those in Texas. Once COVID-19 reached a level of spread, many Texans donned masks and practiced other mitigation measures.
– Texas COVID-19 daily cases per 1mm peaked at 514 on July 14th.
– And while cases in Texas are up from the lows, they are not anywhere close to this peak level
– Notably, this peak in “case spread velocity” is not that different from NY state which peaked at 595 on 4/15
Source: COVID-19 Tracking and Fundstrat
Both Wave 1 and Wave 2 saw daily cases peak at similar “speed”
This chart below is a chronological look at the tiers of states and daily cases per 1mm residents. And as we commented yesterday, it seems like wave 1 and wave 2 both peaked at a similar velocity.
Source: COVID-19 Tracking and Fundstrat
The individual 50 states saw daily cases peak at similar velocities — not exactly 350, but similar velocities…
It might be easier to see this on this scatter chart below. We have two axes, the X-axis is “PEAK daily cases per 1mm” and the Y-axis is days since the peak.” We will be showing this chart a few more times, but we highlight a few things on the first version of this chart:
– see Wave 1 and Wave 2? These are clear based on how many “days since peak”
– We circled the key states in each wave
– NY tristate and F-CAT both peaked at similar “speed of daily cases” at ~400-600 daily cases per 1mm residents
Source: COVID-19 Tracking and Fundstrat
Wave 3: 9states could be nearing “peak speed” while smaller states could see “acceleration of spread”
If we look at the “wave 3” box below, these are states which are currently seeing their peak in COVID-19 daily cases. This is about 24 states in total. But among these 24 states, we see very different levels of “PEAK daily cases per 1mm”
– There are 9 states >400 daily cases per 1mm, and they are potentially the states which are nearing that point when the “governor” kicks in
– The cluster to the left, or states with cases rising but not quite at that peak level, could potentially see cases accelerate.
Source: COVID-19 Tracking and Fundstrat
Looking at the 20-plus states in “wave 3” we put them into the two categories noted above. Those states nearing peak cases (>400 daily cases per 1mm) and those accelerating.
– those 9 states account for ~20% of daily cases in the US but are 7% of the population, so ~3X
– those 9 states will be key to watch given their high share of cases
Source: COVID-19 Tracking and Fundstrat
But the remaining 15 states are 25% of US population, and daily cases could still accelerate sharply in those states. These states have daily cases per 1mm below 300-400 currently, but they are seeing cases rise. So it is possible for the rate of gain to keep accelerating in these states.
– These states also have a relatively lower cumulative case prevalence, of 16,143 per 1mm, so they are below the US average of 23,584.
– Thus, these states will be important to watch.
– The largest ones in this remaining set are PA, OH, WA, MI, CO, MN and IN
POINT 3: Unkillable corporates: Revising 2020 EPS to $100 from $50
We are entering 3Q2020 EPS season and earnings are taking a back seat to 2020 elections and the still surging COVID-19 pandemic. It is early in earnings season, but 3Q2020 is off to a good start.
– Companies are already seeing Q/Q increases in EPS growth
– 3Q2020 Earnings are tracking in the $33-$34 range, up from $25-$26 in 2Q2020
We are already in the nadir for EPS and earnings are beginning to recover. A simple guide to seeing this is to look at the relationship between ISM exports and EPS growth. And as you can see below, when ISM exports recover back above 50, this coincides with a turning point for EPS. Hence, the run-rate for EPS is now positive Q/Q.
– this is far stronger than we expected, as we expected 3Q2020 EPS to be similarly depressed.
– so US corporates are more “unkillable” than even we expected.
But this higher Q/Q EPS is raising our 2020 EPS forecasts as well. We now see 2020 EPS at $100, up sharply from our June 2020 forecast of $54. As shown below, of the $46 increase in EPS:
– $24 of the increase is in the epicenter sectors –> Discretionary, Financials, Industrials, Energy, Materials)
– and for 2021, these groups are the largest contributor to EPS growth
Source: Fundstrat
