Q2 earnings takeaways: Cost-cutting, warming M&A and messages on racial injustice

When the Covid-19 pandemic escalated globally earlier in 2020, we saw record downbeat sentiment heading into the first-quarter earnings season. While investors were still expecting a Q2 cratering, our latest research identified that investors were notably less downbeat.

With low-bar expectations setting the stage for EPS beats, and investor sentiment being the most aligned with executive tone we’ve seen in more than four years, we expected the market to be driven by executive outlooks – which came in generally better than expected. As a result, the S&P 500 reached a record high on Tuesday, August 18.

So what can we learn from this past earnings season? Here are some of our key takeaways:          

Swift cost-cutting actions lead to record EPS beats

More than 80 percent of S&P 500 companies reported earnings above consensus, the highest percentage reporting a positive EPS surprise since FactSet started tracking this measure in 2008. Companies also reported earnings more than 20 percent above consensus, which is the largest surprise percentage reported. What is the key driver behind this?

Executives demonstrated their ability to pull cost levers at their disposal and limit bottom-line pressure at levels far exceeding investor and analyst expectations. During Q&A, however, company commentary on the future outlook of the sustainability of cost reductions was, at best, murky. Rigorously reviewing expenses, identifying what portion is susceptible to being added back in – and under what circumstances – and keeping analyst and investor forecasts in check will help to mitigate volatility and build management credibility.

M&A is heating up

After total deal value bottomed out at $100 bn in April, according to Refinitiv data, Goldman Sachs noted on its earnings call that it was ‘watching for a potential pick-up in M&A activity both from companies coming from a position of strength [and] those challenged by the environment’. Following that, June and July each saw more than $300 bn in M&A activity globally and August has seen several large deals, including a transformational $18.5 bn merger between Teladoc and Livongo, indicating M&A will likely continue to increase in Q3.

The ‘S’ remains in the spotlight… in a new form

More than 300 companies discussed the topic of social and/or racial injustice on Q2 earnings calls. Purpose-driven companies stepped forward this quarter to drive change and lead the narrative in what we consider to still be very early innings in addressing social inequality. We found that companies communicated the following corporate actions: employee listening sessions (31 percent), donations to charities (29 percent), increased diversity in hiring practices (27 percent), bias/sensitivity training (16 percent) and an internal diversity committee (13 percent).

As we head into Q3, it will be critical for companies to address key risks and opportunities in their messaging to the investment community. We encourage companies to use an offensive strategy and leverage their communication channels – whether that be investor presentations or virtual channels – to control the narrative and ensure investor expectations are aligned with the reality. This includes evaluating and communicating the sustainability of cost levers, developing a rich narrative around M&A execution if this a key growth driver, beginning with a clear strategy, and taking action to address racial inequality.

If 2020 has taught us anything, it is that with challenges come opportunities and companies should position themselves to embrace the challenges and seize the opportunities that arise in the second half of the year.

Rebecca Corbin is the founder and CEO of Corbin Advisors