A Brutal Earnings Season May Not Drive Stocks Lower

Earning will be bad - but will it matter?

Stocks (2)

The Q1 earning season kicks off on 14th April and isn’t going to be pretty. Until now the impact of covid-19 on corporate top and bottom lines has been largely theoretical. This week that changes. Companies, straying with banks and health firms will reveal how the early weeks of the coronavirus shut down impacted their revenues, profits, workforce and customers and potentially how it has altered their outlook.

According to FactSet Wall Street analysts expect Q1 earnings to fall by -9.1% (bottom up estimate). This would be the largest year over year decline in earnings since Q1 2016 when earnings declined by 9.8% .

Source FactSet

We know its going to be bad, the big question is how bad and whether the market is able to look through these numbers?

Lack visibility
Q1 is just part of the evidence of the pain that coronavirus outbreak is inflicting. Forward guidance would be the other half of the equation. However, many companies are expected to withdraw guidance for the full year given that visibility is extremely limited. No-one knows how or when the coronavirus crisis will end. This makes any form of forecasting extremely challenging. 

Technical bull market despite shocking data
This week was a good week for US stocks the S&P rallied 12% in just 4 days, the index has now gained 27% from its low struck on 23rd March, putting it technically in a bull market. The market rallied on growing optimism that the coronavirus peak was nearing and on unprecedented central bank stimulus and government stimulus. The latest being a $2.3 trillion programme from the Fed to help small and medium sized businesses.

The same week economic news was shockingly awful as initially jobless claims increased by another 6.6 million, taking total job losses to over 10% of the US workforce from over a three-week period to 3rd April. The 6.6 million was an unprecedented number of job losses and the market barely flinched. More broadly markets have rebounded from the March low despite extremely poor economic data – pmi’s and non-farm payroll. 

Sign of things to come?
The market has been able to look through the horrifying figures on the assumption that once that once the lock down measures are eased in the US and across the globe, economic data will rebound. Fort his reason the central focus has not been economic data, but coronavirus statistics. The sooner the peak is reached, the sooner the number of deaths and infections ease, the sooner the lock down ends. A quick return to normality means a sharp rebound. The longer to lock down continues, the higher the chance of a more deeply entrenched downturn.

With this in mind there is a good chance that the markets will adopt a similar approach with earnings, particularly given the lack of forward guidance. Q1 numbers will be bad, but the focus is likely to remain on coronavirus statistics and the chances of a rebound later in the year.

Build your confidence risk free

More from Equities

Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.