Q2 earnings on tap

A perspective from E*TRADE Securities 07/16/20

It’s the moment many market watchers have been waiting for: The first earnings season to fully capture the extent of the damage from the coronavirus pandemic. A lot of blood, sweat, and tears were no doubt part of this season’s prep, as business leaders are expected to report how their companies responded to global supply crunches, wild demand patterns, and unprecedented uncertainty.

Will companies top estimates even if their numbers are “bad”? Will the results of pandemic-era “winners” justify the stay-at-home rally? And, perhaps most interesting, will anyone be brave enough to offer insight on the future?

These are all burning questions investors will be tuning into as the second quarter earnings season gets underway. Here’s where things currently stand.

It's not supposed to be pretty

Earnings for companies in the S&P 500® are expected to fall nearly 45%, according the FactSet. This would mark the biggest year-over-year decline since Q4 2008, when earnings tumbled almost 70%.1

And the punches may continue to roll in for the remainder of the year before companies catch a break. Analysts are forecasting 25% and 12% earnings declines in Q3 and Q4, respectively, before some moderate growth at the beginning of 2021.1

Source: FactSet Research Systems, July 13, 2020

There's limited visibility

More than 180 companies in the S&P 500 have pulled earnings guidance for the year in the wake of the COVID crisis,2 meaning projecting how things are going to shake out is close to anyone’s guess. While economists generally agree that last quarter was the worst of the downturn, analysts rely heavily on corporate guidance to set investor expectations. The limited visibility has led to the widest dispersion in earnings estimates among analysts since at least 2007.2

This could make the next few weeks very interesting—and potentially volatile—for the stock market. Take, for example, the latest results from FedEx, which shocked investors with a profit 95 cents above the average estimate, and led to a nearly 20% surge in the stock price over the next two days.2 Or Nike, whose performance was well below the lower end of earnings projections, driving shares down roughly 6% the following two trading sessions.2

Despite the lack of guidance, all 11 sectors are projected to see a drop in earnings, led by energy, consumer discretionary, and industrials (cough, airlines).

Source: FactSet Research Systems, July 13, 2020

Big banks up first

The major US banks kicked off earnings season on July 14 with a continuation of themes from the first quarter—namely, beefing up reserves to cover loan losses, with increased trading revenue driving profits (record profits, in some cases).

Bank earnings often set the tone for the season and are particularly critical in the current environment, as customers’ ability to repay debt may provide insight into the health of the American consumer. 

Their results suggest banks believe the toughest part of the recovery may still be ahead. While stimulus programs may have helped individuals and businesses stay on top of debt payments last quarter, banks continued to set aside billions to cover potential losses, as they prepare for persistently high unemployment and a slow economic recovery.3

Financial stocks are one of the S&P 500’s weakest sectors this year, and while they have rebounded off their March lows, they have struggled to keep pace with the broader market’s rebound.

Key themes to watch for

Staring down what could be Wall Street’s worst quarterly earnings performance in more than a decade doesn’t exactly sound like something to look forward to, but it may present some unique opportunities. Consider:

  • How low the bar has been set. With the consensus appearing to be so solidly bearish, there’s always the potential for surprise moves if a given company’s “bad” numbers aren’t as bad as anticipated. Alternatively, companies that have come to be regarded as “winners” of the stay-at-home economy could disappoint if earnings don’t measure up.
  • The extent of the stock rally. The possibility that the market is currently overbought continues to loom in the background, which some market watchers believe could limit upside even if results are, overall, better than expected.
  • The larger picture. Regardless of the outcome, the current round of earnings won’t make or break the market in the long term. But any additional information the results provide could go a long way toward removing some of the uncertainty that has continued to weigh on many stocks (and the economy), despite the historic rebound of the past four months. 

Investors should also keep in mind that a stock’s immediate reaction to earnings news—good or bad—isn’t necessarily a reliable predictor of its longer-term direction and the best investing decisions are those that remain focused on individual timelines, long-term goals, and risk tolerance.

  1. FactSet Earnings Insight, July 10, 2020, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_071020.pdf
  2. The Wall Street Journal, “Wall Street’s Earnings Forecast: Cloudy With a Chance of Turbulence,” 7/12/20, https://www.wsj.com/articles/wall-streets-earnings-forecast-cloudy-with-a-chance-of-turbulence-11594546201
  3. The New York Times, “Banks Stockpile Billions as They Prepare for Things to Get Worse,” 7/14/20, https://www.nytimes.com/2020/07/14/business/big-banks-quarterly-results.html

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