By: Spencer Israel
The Q1 earnings season has arrived like investigators to a house fire.
We just got through a month in which the U.S. economy essentially shut down and markets were at their most volatile in 12 years, including violent swings rivaled only by Black Monday in 1987 and The Great Depression. Now comes the part where companies come out, try to assess the situation, tell us how bad the damage is, and, hopefully, provide some forward-looking guidance.
Just like the economic data, the numbers are going to be bad. Even though the situation didn’t begin to deteriorate in the U.S. until late February, the fallout from March was so swift that it seems all but certain we are headed for an economic recession.
For traders and investors, it’s not so much a question of what will the numbers be, but how bad?
First thing first: the bar is extremely low. As Refinitiv points out, analysts have made over 1,700 earnings revisions for stocks in the S&P 500 since the start of the year—and 1,506 of those revisions, or 87%, were negative. Zoom out to include the entire U.S. stock market, and the number of downward earnings revisions increases to 3,150.
Overall, the consensus is for S&P 500 earnings to have declined by 9% on a year-over-year basis in the first quarter, according to I/B/E/S data from Refinitiv, with the real pain coming from the consumer discretionary, energy, financial, industrial, and materials sectors.
Source: I/B/E/S data from Refinitiv
And the expectations are even worse for Q2. Refinitiv estimates S&P 500 earnings to decline by 20% in the second quarter, and for energy sector earnings to fall 119%.
So, we know it’s going to be a doozy. The next logical question is will the market look past them? The S&P 500 is now 30% off its March 23 low (as of this writing), suggesting that the market is already looking ahead to the slowdown of the virus and the inevitable economic recovery that would accompany it (or at least people are afraid of missing out).
Based on early results, it appears that could happen. On April 14, the day JP Morgan, Wells Fargo, and Johnson & Johnson kicked off the earnings parade, the S&P 500 rose 3%. This was despite the fact that results from the banks were far from encouraging. Not only did both companies report dramatic falls in net income and set aside billions of dollars to protect against bad loans, but very little guidance was provided between them.
For now, the market has shrugged those reports off. And though the picture painted by the two big banks is gloomy, it’s nice to finally get some color on just how bad the damage is on an individual company level. The more holes that we can fill in, the fewer known unknowns there will be to contend with.
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