Glass Half Gone

Yes, really: half of 2020 is now behind us – and as investors assess what might come next, the jury’s still out as to whether their glasses are half full or half empty.


🕰 Recap

  • First-quarter earnings were lower than last year thanks to the early effects of coronavirus.
  • By April, several data points suggested an imminent global recession was in fact already here.
  • Analysts nevertheless persevered in trying to predict the shape the eventual economic recovery would take.
  • Investors currently expect second-quarter earnings to be 44% lower than last year – but companies could actually have fared much worse.



✍️ Connecting The Dots

Financial markets are typically forward-looking. Think back to March, for instance: coronavirus had only just started taking hold in Europe and the US, yet stocks rapidly collapsed into a bear market. Then, against the backdrop of lockdown, stocks rallied – despite there being no clear end in sight to the pandemic. Markets at present have adjusted to “price in” coronavirus’s expected future effects; we’ll only see big price swings if new data risks upsetting those forecasts.

Such apparently monolithic “consensus” forecasts, however, reflect a broad range of analyst predictions. For instance, investment bank Morgan Stanley this month doubled down on its bet that the global economy will bounce back as quickly as it shrank – while rival JPMorgan Chase thinks things won’t be quite so simple, recommending this week that investors be more selective over the next six months. An investor survey by Bank of America meanwhile showed the largest proportion ever believe US stocks, at least, are overvalued.

If that is indeed the case, then there could be trouble in store for several companies as second-quarter reporting begins in a couple of weeks’ time. Analysts expect major US businesses’ earnings will be 44% lower than the same time last year. But since only a handful of them have actually made a second-quarter forecast – and multiples more have ditched their customary predictions altogether – things could be even poorer than predicted. However low things go, bottom of the pile will probably be energy firms: analysts predict profits 105% lower there, with collapsing oil prices to blame. At the other extreme, utilities firms are only expected to show a 2% earnings decline: people still need heat and water, giving companies that provide them a “defensive” quality.


🥡 Takeaways

1. Watch that reproduction number.

Economists making predictions about how quickly the world will recover from this pandemic and those company executives bold enough to estimate 2020 earnings have one thing in common: the giant asterisk footnoting their statements. While it’s normal to flag foibles in any forecast, the current focus on them – specifically around how coronavirus developments might derail predictions – suggests that, in the round, no one really knows exactly what’ll happen.

2. Back to basics.

Absent any steer from a company, investors are forced to return to first principles in order to estimate a firm’s fortunes. Such “fundamentals” include an assessment of how sensitive revenue is to economic growth, consumer confidence, and so on; how flexible the company’s costs are in responding to change; and how a shift in the prices of key inputs like oil will affect overall earnings. Of course, professional analysts will cross-check their base assumptions with companies, hoping to avoid ending up either overly optimistic or disproportionately pessimistic.


🎯 Also On Our Radar

On Thursday, Nike surprised investors by reporting a quarterly loss. Although the company’s online sales rose 75%, total revenue was 38% lower than the same time last year. Back in March, Nike seemed to have coronavirus all figured out – but it now seems the sportswear giant had been counting its wins before its points were on the board.

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