When silence is golden
Companies are regularly criticised for setting a “low bar” ahead of quarterly earnings, in order to be able to surprise positively. For the first three months of 2020 however, the story is different — there is simply no bar. As such, investors should not expect to get much more information on companies’ results or earnings expectations.
Impossible to meet, beat or miss
The success of an earnings season is usually measured by a combination of the proportion of companies surpassing analysts’ forecasts and the magnitude by which they do so. This time, however, there is no valid consensus or guidance. Indeed, a large proportion of US and European companies have withdrawn all revenue and profit targets for both the quarter and for 2020. As a result, analysts and investors alike are left flying blind.
For what it is worth, we go into this earnings season with a “consensus” that expects 1% year-over-year growth in revenue and a 6% decline in earnings per share for S&P 500 companies. While these numbers have fallen significantly, from 4.5% and 6% growth, respectively, at the beginning of the year, it is impossible to know if these projections are realistic.
None the wiser?
Although companies may release better-than-expected first-quarter earnings, investors will likely dismiss them as not reflective of the current situation. In addition, guidance from companies usually carries much more weight in deciding how stocks react to earnings data.
But here again, given the limited visibility, we believe companies will not be able to re-instate targets, having cancelled them last month. Of course, at the sector and company level, we expect to see relative winners (companies with sustainable, “quality”, earnings and those with strong balance sheets) and losers. This suggests continued dispersion in performance.
From a macro point of view, little insight may be gained. As a result, we believe that the first-quarter earnings will largely be ignored, being seen by many as being almost irrelevant. We will most likely be none the wiser once it ends.
When no news is good news
But this is not necessarily a bad news for equity markets. While earnings data matter over the medium term, in the short term they can be ignored and this is what is likely to happen for now. At this stage, nobody, not even the companies, know what 2020 earnings will look like.
After generating $160 in earnings per share last year, will the S&P 500 generate earnings of $130 (-20%), $110 (-30%) or even $100 (-37%) this year? Any of these numbers would make the 12 months’ forward price-to-earnings-ratio ridiculously high anyway (at 20 times to 27 times earnings). Yet, this is what investors appear willing to pay today.
2021 to the rescue
Due to the lack of reliable short-term company data, investors can’t reasonably model and quantify what the next 12 months of earnings will look like. For this reason, they are likely to simply ignore 2020 earnings and focus on the recovery that is expected to take place later this year and next. Rather than earnings reported for this quarter, we believe that the next piece of company data that matters for financial markets will be the second quarter “exit” growth rates, showing how growth in June compares with what it was in the quarter. Until then, it’s all about science and COVID-19 infection rates.
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