- First-quarter earnings were lower than last year as a result of the early effects of coronavirus.
- Analysts expect second-quarter earnings to be 44% lower on average than last year – but companies could actually have fared much worse.
- Last month, the CEO of Goldman Sachs warned that US stock prices might be higher than they should be.
- Still, US stocks just clocked their best quarter in over 20 years.
✍️ Connecting The Dots
US stocks just had their best quarter in more than twenty years, with the main index up 20%. But some analysts have argued that this rise will prove meaningless if it’s not soon supported by company fundamentals – i.e. by earnings growth. Put another way, when analysts compare a company’s share price to its earnings per share, a high resulting price-to-earnings (P/E) ratio suggests stocks are expensive – like now – while a low one implies shares are relatively cheap.
High stock market valuations put pressure on companies to justify them with improving future earnings, and earnings updates play a key part in shaping investors’ expectations for what’s coming next. With that in mind, banks – whose health is essential to the health of the overall economy – will be under the microscope. Analysts are expecting financial services firms to report 50% lower profits than the same time last year, even though their shares have risen 10% in the last three months. What banks say about the effects of low interest rates and the rising cost of defaulted loans on their profits, then, could bolster their recent rally or reverse it altogether.
US tech stocks represent around a quarter of the country’s stock market, so they’ll be key to maintaining its momentum. Analysts reckon tech stocks will report a 10% drop in profits – the smallest anticipated decline of any industry, bested only by utilities companies whose earnings aren’t expected to fall at all. As for stock market celebrities the FAANGs, investors will focus on whether the lockdown-driven acceleration in demand will continue, or if the return to normal life starts to moderate their growth.
1. Putting the fun in fundamentals.
With most US companies opting out of forecasts for either the second quarter or the year as a whole, analysts have spent more time than usual digging through the numbers to generate their forecasts. That’ll naturally result in a wider range between the highest and lowest estimates, and a greater risk companies will either dramatically beat or miss forecasts. That’s pretty clear to most investors, though, so it’s likely we’ll see less frantic buying or selling of stocks after their updates than usual.
2. There may be a premium on certainty.
Fewer than 50 US companies made predictions for the second quarter back when they revealed their first-quarter earnings. And while any future predictions will be heavily caveated by coronavirus developments, those companies with more predictable earnings that do choose to give guidance – like utilities, telecoms, and consumer staples – might find their shares in high demand from investors craving any inkling of certainty.
🎯 Also On Our Radar
FedEx offered a preview of exactly what the upcoming season has to offer on Wednesday when it announced higher-than-expected quarterly earnings. The company didn’t give an earnings forecast, mind you, blaming it on the uncertainty of the timing and pace of any economic recovery. But investors didn’t seem to mind and bought up its shares anyway, pushing them up 9%.