Investors get set for US earnings season without precedent

0

Wall Street is preparing for an earnings season like no other, offering investors insights into the damage wrought by coronavirus on the US’s biggest listed companies.

PepsiCo kicked things off on Monday with better than expected figures for the second quarter ending in June, showing that consumers snacking from home resulted in only a modest 3 per cent drop in net revenues from the same period a year earlier, and an 18 per cent fall in earnings per share.

But numbers elsewhere may be less nourishing for investors. S&P 500 companies are expected to unveil an overall 45 per cent plunge in quarterly profits, according to data provider FactSet — the biggest drop since the 69 per cent fall of the fourth quarter of 2008. All 11 of the US benchmark’s sectors are forecast to post declines.

“US companies are about to give us a look into their worst quarter since the great financial crisis,” said Lindsey Bell, chief investment strategist at broker Ally Invest.

And if the numbers will be grim, the outlook may not provide much more comfort. Around 150 companies in the S&P 500 have already withdrawn their formal guidance on profits, according to analysts at Bank of America, saying that the path of the pandemic is just too uncertain.

“We are now living in an information blackout,” said BofA analysts, noting that the gap between analysts’ lowest and highest estimates is close to record levels. In that context, results that beat analysts’ forecasts by a wide margin “might not be enough” to deliver strong share price performance.

Here are five key questions.

Can companies profit from signs of economic recovery?

Forward-looking commentary will be more important than ever as investors look for signs that companies have begun to benefit from the tentative improvements in economic data. Shoqat Bunglawala, a portfolio manager at Goldman Sachs Asset Management, said headline numbers were “likely to be pretty stark” but that guidance would be critical. “It is important to look at whether we get some indications from companies across sectors . . . as to whether there are signs of recovery,” he said.

Jonathan Golub, chief US equity strategist at Credit Suisse, said that the story of the season is “going to be not only, ‘it is good or bad?’ but ‘who is able to come through this crisis better than others?’”

How did top lines survive lockdown?

Revenues are forecast to fall just over 10 per cent across the S&P 500, according to FactSet. The energy sector is expected to record the biggest decline, with a drop of just over 40 per cent reflecting the collapse in the price of oil. The only sector poised to report a rise in revenue is healthcare, while utilities are expected to have largely weathered the storm, with flat revenues.

Bar chart of Forecast revenue growth (%) showing Revenues are set to slide across almost all sectors

How strong are balance sheets?

US non-financial companies are carrying debts of about $10tn, raising questions over whether some will be able to keep servicing those obligations. Kasper Elmgreen, global head of equities at Amundi, said that the market has been relatively relaxed over rising debt levels, partly because financial conditions have eased and credit “seems abundant”. But he added that he is concerned that companies in some sectors are holding out too much hope for a quick economic recovery.

How severe are banks’ loan losses?

US banks will be an area of particular focus, not just for their own numbers — boosted by trading and weakened by writedowns — but also the insights they offer into the broader economy.

“It’s been a wild few months,” Jesse Rosenthal, head of US financials at CreditSights, wrote in a recent note to clients.

“Commentary and tone remain important for bank investors, particularly as the most germane impacts from the pandemic downturn — credit losses — are still at least a quarter away from ramping up,” he said.

Trading should offer some consolations, though. JPMorgan, for example, which is among an early crop of reports on Tuesday, has forecast a 50 per cent year-on-year rise in its markets revenues, led by fixed income.

Are valuations sustainable?

The US benchmark index rose nearly 20 per cent between April and June, suggesting investors see the quarter as a low point and are looking ahead to a rebound.

Line chart of S&P 500 forward price to earnings ratio showing US stocks look expensive

But gains in the S&P 500 have stalled over the past few weeks, amid lingering uncertainty over the spread of the virus. Several US states continue to struggle to keep new Covid-19 cases under control.

Meanwhile the market is expensive, and some analysts and fund managers warn that optimism is misplaced. The S&P 500 now trades at about 22 times its constituents’ forecast earnings this year, well above its five-year average of 17 times.

For the latest news and updates, follow us on Google News. Also, if you like our efforts, consider sharing this story with your friends, this will encourage us to bring more exciting updates for you.

Source

Get real time updates directly on you device, subscribe now.