Earnings season is supposed to be a time of clarity, giving investors a detailed look into the health of corporations and a chance to hear from executives about what’s to come. Not this time around.
One week in, and the only thing that’s clear is that no one feels confident making profit or sales forecasts for coming months. Analyst earnings estimates, already all over the map in the early days of the coronavirus pandemic, remain incredibly inconsistent, with gaps between the highest and lowest among individual stocks holding near records.
The lack of clarity is the market’s new reality, a veil of uncertainty that’s descended over equities not entirely dissimilar from the confusion so many people feel aboutwhat’s ahead for the economy and everyday life. The absence of guidance from executives means that for the time being investors can’t value stocks using the profit metrics they’ve relied on in the past.
“As your mother used to say, ‘If you can’t say something nice, don’t say anything at all,’” said JJ Kinahan, the chief market strategist at TD Ameritrade. “It’s not that they can’t say something nice — they don’t know what to say.”
Usually shareholders look to companies themselves and research shops for estimates of what future revenue and profit will look like, giving them an idea of what a stock is worth. With no forecasts to go by, expected measures of volatility on earnings release days areheightened and fund managers are left looking at other second-tiermetrics like liquidity and leverage to try to put a value on equities.
Of the close to 50 companies that had reported earnings as of Monday morning, only nine of them had provided estimates of what profits would look like this year, according to Credit Suisse. Among those nine, only a third updated their forecasts when they reported, while six firms pulled their previous guidance.
The sample size may be small, but it’s a window into the psychology of corporate executives in the wake of the crisis. So far, they’ve been more apt to take a wait-and-see approach than attempt to forecast what business will look like in the months to come. That as the S&P 500 just notched its first back-to-back weekly gains since before the volatility began. The benchmark gauge is now up 28% from the late-March lows.
There will likely be a knock-on effect from a lack of corporate direction, according to Credit Suisse’s chief U.S. equity strategist, Jonathan Golub.
“We’re flying blind,” he wrote to clients. “In the absence of guidance, analysts will not fully mark down earnings estimates. Put differently, lack of guidance should leave estimates too high for future quarters, even after 1Q reports.”
Analysts who cover companies nowexpect S&P 500 profits to fall every quarter this year when compared with the same period a year earlier. The annual decline for 2020 will total almost 17%, according to forecasts compiled by Bloomberg Intelligence.
But even after earnings expectations fell by $10 in justone week, three times the size of any other cut in the past five years, a forecast for per-share profits of $136.20 is still well shy ofexpectations from Wall Street strategists who look at corporate America as a whole. The bleakest of those calls for a drop to $110 a share.
“Earnings revisions have finally begun to catch up with reality,” said Peter Cecchini, Cantor Fitzgerald’s global chief market strategist. “Keeping in mind that earnings drops in recessions average in a range of down 25% to 30%, we believe there are larger downward revisions to come.”
Of course there’s reason to question the validity of forecasts given that outlooks for the economy and a return to normalcy are far from certain.
Before the earnings season began, a measure known as estimate dispersion — how much the highest and lowest per-share prediction varies on the average stock — wasclose to record highs. Now, with one week of reports in the books, that same measure is holding near the highest levels in data going back two decades, according to Bank of America.
Still, forecasts aredriving reactions to earnings reports. Investors are still reacting by the usual script: rewarding companies that beat predictions and punishing those that miss. Jumpy markets are making the gains and losses bigger than usual, but the overall pattern is intact, contrary to some expectations.
The void of information spans across industries. More than 70 companies have pulled profit guidance since the end of February, according to Bloomberg Intelligence. Retail and capital goods firms have seen the highest number of withdrawals, but the impact is widespread.
Last week, the chief executive officer of oil explorer and producer ConocoPhillipswithdrew the 2020 guidance it provided just four weeks ago. Health-care company Abbott Laboratories said its previous forecast no longer applies, citing uncertainties about the duration and impact of Covid-19. The week prior, fast food chain McDonald’spulled its guidance.
“The delta on what could actually happen is big enough where they don’t want to make a commitment,” said Jerry Braakman, chief investment officer of First American Trust, in Santa Ana, California. “They don’t have enough visibility to make that statement with confidence and we’ll continue to see that this earnings season.”
— With assistance by Vildana Hajric
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