First-quarter S&P 500 company reports have shown a 23% earnings contractions so far. Any earnings beats are hardly a reason to be bullish.
Stock market benchmarks ticked higher Monday ahead of a deluge of quarter one earnings reports. Equities extended a modest four-day rally as the first states prepared to relax coronavirus restrictions. Markets also warmed to a much-needed increase in testing capacity.
The Dow Jones closed the day 1.5%, or 359 points, higher. The S&P 500 Index correlated tightly with the Dow’s 1.5% gains. And the Nasdaq Composite finished 1.1% higher.
This week market analysts are covering possible earnings beats as bullish news for their company’s stocks. They’re covering earnings season as if it’s any old first quarter. In other words, as if coronavirus and job losses dwarfing the Great Depression aren’t happening.
That’s very odd.
For example, Zack’s Equity Research writes of Facebook’s (NASDAQ:FB) earnings report:
Have you been searching for a stock that might be well-positioned to maintain its earnings-beat streak in its upcoming report? It is worth considering Facebook (FB), which belongs to the Zacks Internet – Services industry.
That begs a glaring question.
What good is beating an already grim earnings forecast? The average analyst expectation? Facebook made earnings per share of $1.75 in the first quarter, on $17.5 billion in revenue. That’s a 31.6% decline from Facebook’s Q4 2019 earnings per share of $2.56.
Year over year, it’s a decline from the $1.89 EPS Facebook would have reported a year ago if not for that multi-billion FTC fine. Even if Facebook beats earnings forecasts, why would that in itself make FB a buy? And is a, say 9% decline in EPS, instead of the forecasted -11%, a buy signal for Amazon (NASDAQ:AMZN)?
Jan 2020 stock market euphoria was inappropriate enough. But even coronavirus and Great Depression-level economic indicators haven’t shaken off the feels.
Companies beating already-dire forecasts of earnings contractions is a silly reason for markets to be long equities. Doing slightly better than the horrible estimates isn’t good news. It’s less harmful, but it’s still horrific news for these businesses.
According to Raymond James Chief Investment Officer Larry Adam, here’s what the stock market is rallying into this week– a 14.4% broad earnings crash:
Overall, the S&P 500 is now expected to see a 14.4% earnings contraction in Q1, with the majority of weakness coming from the Energy, Consumer Discretionary, Financials, Industrials, and Materials sectors.
The 122 S&P 500 companies that have already posted earnings are down 22.7%.
Coronavirus has crippled the economy, and there is no way to be sure what will happen with the pandemic next, or how governments and the general public will react to it.
Meanwhile, Kevin Hassett, a Trump economic adviser said Sunday:
This is the biggest negative shock that our economy, I think, has ever seen. We’re going to be looking at an unemployment rate that approaches rates that we saw during the Great Depression.
He gave a dreadful sense of scale:
During the Great Recession… we lost 8.7 million jobs in the whole thing. Right now, we’re losing that many jobs about every ten days.
At best, rosy earnings coverage assumes equities have already priced in the apocalypse. But then again, so have the forecasts. It’s a very odd time to be bullish.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in any of the stocks mentioned.
Last modified: September 23, 2020 1:52 PM