earnings season will be unlike any other, as travel restrictions and
lockdowns related to COVID-19 have impacted results dramatically.The
biggest economic hits came in mid-March, however, and won’t be fully
captured in first quarter results. This makes company guidance
particularly important as market participants look for clues into what
earnings may look like for the rest of the year.
EARNINGS SEASON UNLIKE ANY OTHER
It goes without saying that this will be a reporting
season unlike any other. For some companies less impacted by the
COVID-19 pandemic, the numbers may appear normal. For others, the focus
will be on balance sheet strength and survival. The separation between
winners and losers is widening in this environment.
Turning to the numbers, with 41 S&P 500 Index
companies having reported results (mostly with quarters ending in
February), index earnings are tracking to a 14% year-over-year decline,
down from the 4% increase expected on January 1 and 5% decrease expected
as of March 31. We think even these lowered estimates may be tough to
achieve, given heightened uncertainty during the pandemic, the
significant number of companies that have withdrawn their guidance for
analysts, and lingering stale estimates.
WHAT TO WATCH
We highlight four main themes for this earnings season:
Don’t count on a low bar. The bar has
been lowered significantly, which is typically a recipe for
better-than-expected results. According to Bespoke Investment Group,
analysts have raised estimates for only 88 companies in the S&P 1500
Index over the past four weeks, while 1,236 companies have seen
estimate cuts, the most since at least 2008. However, with so many
companies having pulled their guidance, and the dramatic changes in
economic conditions over the last few weeks of the quarter, misses may
be more prevalent than they typically might have been, even in a
There will be winners. This environment may also provide opportunities for some well-positioned companies:
So-called “stay-at-home stocks,” many of them in
internet, digital media, and e-commerce, have performed well recently in
anticipation of strong results.
Many consumer staples companies are helping us stock our shelves and eat all of our meals at home.
Even before COVID-19, healthcare companies enjoyed
perhaps the best visibility into their near-term earnings prospects.
They’re playing a key role in testing and treatment and are big stimulus
Results for the technology sector may surprise to the
upside, based on the relative resilience of the sector’s estimates in
recent weeks and current mobility and work-from-home trends.
Finding the floor. For companies most
impacted by COVID-19, the focus will be on survival more than anything
else. It will be about balance sheets and cash piles. Some of the
hardest hit areas will include travel-related businesses, such as
airlines and hotels, and certain brick-and-mortar retailers,
restaurants, and entertainment companies that are deemed non-essential
and depend on public gatherings. With oil prices having fallen more than
60% in the first quarter, earnings in the energy sector may be
All about guidance and scenarios. With
so many companies pulling their outlooks, analysts and strategists
forecasting in this environment have had to do some guessing. Given the
uncertainty, investors will be looking for help developing credible
scenarios depending on how long the stay-at-home orders remain in place.
Every country and state is in a different place, increasing forecasting
WHAT WE KNOW ABOUT 2020
While forecasting in this environment is very difficult, we now know more than we did a month ago:
Recession almost certainly began in March. We have sufficient evidence to say with confidence that a recession began in late March.
The contraction in US economic activity, measured by gross domestic
product, may approach 10% during the second quarter (not annualized).
The unemployment rate is at its highest level since the Great
Depression, possibly in the low-to-mid teens.
Containment efforts are working. In
terms of beating this virus, social distancing is working, and the
outbreak already may have passed its peak in the United States. The
progress has opened the door to easing some lockdown restrictions and a
gradual reopening of many state economies in the United States beginning
as soon as this week. The Trump administration’s guidelines for
reopening, released April 16, likely contributed to April 17’s stock
market rally by shoring up confidence in the recovery. Some promising
treatments in development also helped.
Estimates have collapsed. Finally, we
also know that consensus 2020 earnings estimates for the S&P 500
have fallen precipitously in recent weeks to around $145, according to
FactSet, suggesting that our prior base case earnings forecast for the
S&P 500 of $158–162 may be overly optimistic [Figure 1].
ADJUSTING 2020 ESTIMATES
Based on containment progress and prospects for
recovery, we think $138–142 in S&P 500 earnings per share (EPS) for
2020 (previously our bear case) is a reasonable target. That’s about a
15% drop from 2019 and in the range of declines observed in prior
short-lived recessions not accompanied by a full-blown financial crisis.
We expect a strong second-half economic rebound, supported by massive
fiscal and monetary stimulus, to help support a recovery in corporate
profits. We also acknowledge uncertainty introduces downside risk.
PLAYBOOK SUGGESTS NEAR-TERM CAUTION
We continue to follow our Road to Recovery Playbook to evaluate the market’s bottoming process. We made two changes to our playbook last week[Figure 2]
One was to Signal #1, “Confidence in the timing of a
peak in new COVID-19 cases in the United States,” which we upgraded from
“monitoring daily” to “almost there.” We hope to be able to declare the
peak in new cases with confidence this week. The second was to Signal
#4, “Sentiment and technical analysis indicate limited number of sellers
remaining.” Recent gains have removed oversold conditions, with the
percentage of stocks in the S&P 500 above their 200-day moving
average having crossed above 20% last week, after falling below 5% in
late March, suggesting significant technical improvement taking place
under the surface.
Two signals remain checked off. Job losses have given
investors visibility into the severity of a US recession (#2), while
massive policy responses from Washington, DC, and the Federal Reserve
have helped shore up investor confidence and cushioned the economic blow
(#5). The last signal, Signal #3, remains unchecked, with the S&P
500 now only 15% off of its February 19 high and no longer pricing in a
For tactical investors, we believe patience is prudent
here. We believe stocks have come too far, too fast and that a 5–10%
pullback may be likely. Historically, patterns following prior bear
market lows support this view.
For long-term investors, we continue to believe stocks
may be more attractive than bonds at current valuations, and we would
recommend overweight allocations to stocks, and a corresponding
underweight to fixed income for suitable investors.
Our year-end 2020 fair value target range for the
S&P 500 remains 3,150–3,200, less than 10% from April 17’s close at
the low end of the range.
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no assurance that the views or strategies discussed are suitable for all
investors or will yield positive outcomes. Investing involves risks
including possible loss of principal. Any economic forecasts set forth
may not develop as predicted and are subject to change.
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The Standard &
Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500
stocks designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing
all major industries.
S&P 1500 Index: A
broad-based capitalization-weighted index of 1500 U.S. companies and is
comprised of the S&P 400, S&P 500, and the S&P 600.
Earnings per share
(EPS) is the portion of a company’s profit allocated to each outstanding
share of common stock. EPS serves as an indicator of a company’s
profitability. Earnings per share is generally considered to be the
single most important variable in determining a share’s price. It is
also a major component used to calculate the price-to-earnings valuation
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