US Reporting Season: what to expect from this quarter’s results

The market data that matters (S&P500):

Source: Bloomberg, Bloomberg Intelligence

What is the market expecting out of this earnings season?

The market has resigned itself, and perhaps priced-in large part, that the Q1 reporting season is going to deliver bad news. The Covid-19 virus has forced the US, and significant parts of the global economy to grind very close to a halt, the consequence of which is expected to have already fed through into corporate revenues, with the worst, of course, still to come. As a result, this earnings season is about market participants gauging how big of a hit, collectively, corporate America sees this Covid-19 crisis on earnings, and how long this drag on earnings can be roughly expected to persist into the future.

What are the key themes to watch out of earnings season?

How big of an impact has Covid-19 had on earnings already?

Though the Covid-19 outbreak and its deleterious effect on global growth began to emerge at the end of January, when China was forced to shut down large parts of its economy to contain the virus, the greatest impacts of the pandemic weren’t truly witnessed well into the quarter, in March. Nevertheless, data and analysis from Bloomberg Intelligence suggests that the shock to earnings growth from the pandemic in Q1 ought to be -10.7%. Given the highly uncertain environment, as well as the high number of companies withdrawing or suspending guidance, estimates are highly variable, and quite likely prone to big surprises.

What guidance can US corporates give about future earnings growth?

The markets have, and will likely continue, to stomach bad news about the past. But given the uncertainty about fundamentals as governments fight to contain the Covid-19 pandemic, market participants are keenly awaiting what guidance companies can deliver in regard to the path of future earnings. Consensus analyst estimates are clearly assuming a “V” shaped rebound, where EPS will drop to $US31 next quarter, before rocketing higher in subsequent quarters, as the US economy, presumably, reopens. It’s a major presumption, and one that is underpinning much of the recent recovery stock prices, leaving the market open to disappointment if companies don’t share this optimistic outlook.

Which areas of the market will likely be hardest hit?

According to analysis performed by Bloomberg Intelligence, the contraction in earnings is estimated to be broad-based and deep for S&P500 companies. Extending a recent trend, which has been exacerbated by the Covid-19 crisis, along with the Saudi-Russian oil price war, EPS for the energy sector is expected to have fallen 50.9% last quarter. Other cyclical sectors are also expected to record deep declines in EPS. Earnings for the Consumer Discretionary sector is estimates to have fallen by 29%, while trade sensitive industrial and material sectors’ EPS is forecast to contract by the same amount. Defensive sectors, along with Information Technology stocks, are expected to deliver slightly positive earnings growth.

How could this earnings season impact the financial markets?

Given the macroeconomic context, and the arguably unprecedented level of volatility experience in global stock markets last quarter, this reporting period may the most significant in a decade. The S&P500 has surged from its March 23 lows, supported by huge stimulus injections by central banks and governments, signs that the Covid-19 infection rate globally is falling, and the prospect of a “V” shaped recovery in global economic growth. What US corporates deliver this earnings season will test the mettle of the market’s recent rebound, and whether it amounts to the beginning of a sustainable recovery, or simply a bear-market bounce.