The 5 biggest takeaways from earnings season, according to a Wall Street chief stock strategist

• With two-thirds of S&P 500 quarterly reports released, a team of RBC Capital Markets analysts scoured data and transcripts to judge what's in store for the stock market.
• The quarter ended in June saw the coronavirus wane, reopenings begin, and outbreaks rebound. While some sectors thrived on uncertainty and defensive allocations, others delayed hopes for recovery.
• Here are the five takeaways RBC found from companies' second-quarter reports, from mixed corporate forecasts to unappreciated small-cap stories.
• Visit the Business Insider homepage for more stories.

Roughly two-thirds of S&P 500 companies have reported their second-quarter figures, and RBC Capital Markets found several lessons to learn from the unprecedented earnings season.

The quarter ended in June saw the US initially curb the coronavirus's spread, start reopening efforts, and subsequently fall into a second wave of infections. Companies that projected strong rebounds after the first half of 2020 pushed their forecasts back. Where some companies struggled to keep investors happy, others surged higher by blowing Wall Street's expectations out of the water.

The team of analysts led by Lori Calvasina, head of US equity strategy at RBC, scoured quarterly reports, earnings calls, estimate changes, and price reactions to better understand the pandemic-rattled market. Detailed below are the five takeaways RBC found from firms' second-quarter earnings.

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(1) Good prints, mixed results

Second-quarter readings largely trounced Wall Street's expectations. Banks' trading operations brought in record or near-record revenues, and tech stocks surprised with across-the-board successes. In all, the analysts expect an all-time high 83% of S&P 500 firms to beat estimates in the second quarter.

Earnings deterioration also came in better than feared. Profit declines are tracking at 36% compared to the 44% estimate, the team said.

Yet the good results haven't directly translated to market rallies. Only 39% of S&P 500 companies to report earnings in July traded at least 1% higher in the session after reporting earnings, and 40% of firms traded at least 1% lower.

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(2) Earnings sentiment reaching fever pitch

Analysts use the rate of upward earnings estimate revisions to track overall sentiment throughout the market. The metric continues to skyrocket as results come in better than expected, but RBC is preparing for the sentiment leap to peter out.

The firm's upward EPS revisions indicator leaped to 66% in early August after sitting as low as 8% in April. Yet the rate usually peaks between 72% and 79%, according to the analysts. The rate's rapid ascension is "keeping us on guard for a topping out in this indicator in the not-so-distant future," they added.

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(3) Varied commentary

RBC's analysts scanned earnings call transcripts and found a handful of narratives permeating through second-quarter results. Of the companies issuing guidance, several warned that virus-related uncertainties clouded their forecasts, RBC said. Others noted that their continued recovery — and a recovery across the US economy — relied on new stimulus from Congress.

Many executives highlighted healthy growth in business conditions and consumer demand in June and July but expressed wariness for continued improvement as virus outbreaks intensified, the analysts said.

Companies were also less likely to predict the shape of the country's economic recovery than they were in the first quarter. There was also "no clear consensus on the path going forward," the analysts said.

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(4) Winners and losers

Though stocks' reactions to earnings were somewhat mixed, certain sectors emerged as the season's clear victors. Consumer staples stocks enjoyed the most positive price reactions and the third-highest beat rate for quarterly earnings, RBC said. Tech names also thrived. The sector boasted the highest share of companies beating profit estimates and enjoyed the best rate of forward-looking upward earnings estimate revisions.

Yet two sectors fared worse through the season. Energy and real estate investment trust stocks ranked lowest on EPS beats, with the latter having the worst trend for earnings estimate revisions. Energy was one of the weakest sectors regarding stock reactions to earnings.

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(5) Small-cap stories

Neither small- or large-cap stocks have taken the lead in the stock market since mid-July when earnings season kicked off. Yet smaller names are printing slightly stronger earnings results, the team wrote. The share of companies beating estimates surged in the Russell 2000 as it did for the S&P 500, but the uptick was more extreme among small-cap equities than large-cap stocks. The rate of upward earnings estimate revisions has also surged for small-caps.

All in all, small-cap stocks are experiencing a slightly stronger recovery in earnings, but investors have mostly looked through the outperformance and kept the small-versus-large trade relatively even, RBC said.

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