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AAM Viewpoints – 2020 Earnings Outlook

‘Tis the season for outlooks and one of the more dependable indicators for the equity market over time has been the direction of corporate earnings. Not surprisingly, as the earnings power of U.S. corporations has grown, equity prices have moved higher. Tracking data from the Bureau of Economic Analysis, the correlation between the level of corporate profits and the price of the S&P 500 Index is 0.94 over the last 72 years (1947-2019), indicating a strong, positive relationship. From a strategic or long-term allocation standpoint this is very useful.

What might come as a surprise is that over the short-term, the strong, positive relationship doesn’t always hold. In fact, there is evidence that suggests over intermediate periods earnings growth and equity prices can be negatively correlated. Look no further than the prior two calendar years as examples. In 2018 the S&P 500 Index posted staggering earnings per share growth of 20.2% while the benchmark fell 4.4%. Compare that to 2019 when the S&P 500 Index is estimated to end the year with flat (zero) earnings growth and the benchmark surged 31.5%. The simplest explanation is timing. The equity market tends to be forward looking while earnings reports for the most part are backward looking, but as you can see from a tactical or short-term allocation standpoint earnings growth as an indicator can be tricky.

The good news for the long-term equity investor is earnings for S&P 500 companies are expected to rebound in 2020 after a soft 2019. The fourth quarter 2019 earnings season is on-deck with FactSet estimates calling for a slight drop before we get into calendar year 2020 where current estimates are 9.6% earnings per share growth coupled with 5.4% sales growth. The chart and table below lay out recent trends and the current estimates.

S&P 500 Earnings and Sales Growth: 2014-2020
Source: AAM | FactSet data | Past performance is not indicative of future results.

S&P 500 Earnings and Sales Growth: 2014-2020
























S&P 500 Return








Source: AAM | FactSet data, *estimate | Past performance is not indicative of future results.

The S&P 500 finished 2019 with strong returns, gaining over 9% in the 4th quarter alone. With the benchmark hovering near its all-time high the rebound in earnings is likely already priced in. What will be important to keep an eye as we move through 2020 is if companies can meet analyst’s/street expectations. Over the past five years, on average, the actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4.9%, known as the “earnings surprise.” Over the same period, 72% of companies have reported actual earnings per share above the average estimate. Often, it’s not the absolute level of earnings reported, but the relative level or surprise that can move the market. Given the tendency for companies to beat expectations, if current estimates hold, we believe that we will likely see double-digit earnings growth by the time 2020 is all said and done. Recent history has shown us that it might take a while for the price level of the benchmark to reflect such results if they occur, but over time rising corporate profits should correlate nicely with rising equity markets.

CRN: 2020-0110-7909 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


2020 Investment Outlook

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