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Earnings Preview for Innovative Firms

By:

Head of SPDR Americas Research

Matthew Bartolini takes a look at the last earnings season of 2020 and discusses the growing interest toward thematic innovative ETF strategies.

The last earnings season of a tumultuous 2020 has begun, and it is about pick up speed over the next few weeks as 40% of the S&P 500 is expected to report results by the end of the month.1 Expectations are for the S&P 500 to register a -6.8% decline in earnings growth this quarter, its seventh quarter of year-over-year earnings declines in the last eight.2

However, the fourth quarter figure has been revised upward over the last few weeks up from -12.7%.And given that the last two quarters saw sizable upside surprises, the fourth quarter figure could end up higher than what is expected today, and perhaps positive4  – a supportive trend as we head into 2021.

Now, while the earnings trends for S&P 500 firms garner a significant amount of coverage, stocks further down the cap spectrum – and the firms associated with innovative trends not included in the glamourous MT. FAANG5  group—remain largely uncovered

Yet, as a result of the transparent nature of ETFs, this insight can be gleaned by leveraging the underlying holdings of our broad-based innovation ETF, KOMP, the SPDR® S&P Kensho New Economies ETF, and the areas of disruptive innovation it covers.

Innovative firms have one up on the market

One trend heading into 2021 has been the outsized interest toward thematic innovative ETF strategies. By the end of 2020, assets in the thematic ETF category had grown organically by 171%, with over $42 billion of inflows.6 The rationale for these flows is based on the potential for higher growth from allocating to a selection of firms at the forefront of the innovation re-shaping our society. And as noted above, growth is sorely needed considering the sluggish trend even prior to the pandemic (there hasn’t been positive quarterly year-over-year growth since Q1 2019).7

This notion of potential higher growth has coincided with outsized returns, as investors seek out those potential high-growth prospects. In 2020, 67% of thematic ETF strategies outperformed the S&P 500 Index– by an average rate of 37% (56% to 18%).Yet, if higher growth is not being delivered, then the valuation multiples being offered may no longer be worth the price – and risk could be skewed to the downside for these firms/funds.

Innovative firms, based on the 400-plus holdings within KOMP, have illustrated their growth potential, however. The earnings profile from the three quarters of 2020 indicates this notion of higher than market growth potential. In those three quarters, growth was higher (albeit still negative given the crisis in Q1 and Q2) for innovative firms within KOMP, as shown below.

three quarter earning trends 2020

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Footnotes

1 Bloomberg Finance L.P. as of January 15, 2021
2 FactSet based on consensus analyst estimates as of January 15, 2021
3 FactSet based on consensus analyst estimates as of January 15, 2021
4 Per FactSet as of January 15, 2021 if the past two quarter average increase is applied to the estimated earnings decline at the end of Q4 (December 31) of -9.2%, the actual earnings growth rate for the quarter would be 4.8% (-9.2% + 14.0% = 4.8%).
5 Microsoft, Tesla, Facebook, Apple, Amazon, Netflix, and Google
6 Bloomberg Finance L.P. as of December 31, 2020 per SPDR Americas Research calculations
7 FactSet as of January 15, 2021
8 Bloomberg Finance L.P. as of December 31, 2020 per SPDR Americas Research calculations

Originally Posted on January 22, 2021 – Earnings Preview for Innovative Firms

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