Wednesday, April 1, 2020

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Everyone’s going into earnings season with no visibility

The first quarter has finally ended. And in a few weeks, companies will begin announcing quarterly financial results and perhaps provide some guidance about the rest of the year.

And although no one knows what to expect, most agree that Wall Street’s current expectations for a 1% decline in S&P 500 earnings in 2020 are about to get slashed dramatically.

As we’ve covered in this space over the last few weeks, investors and analysts are now flying blind as the coronavirus pandemic has managers on the front lines of business at a loss to even guess at where things are heading.

“I cannot answer the future-outlook questions — too many unknowns,” a manufacturer said according to the Dallas Fed’s latest activity survey.

Forming any forecast right now has proven futile as the coronavirus pandemic and the resulting financial market and policy responses have been totally unprecedented. For the time being, most analysts have either made no change or just modest changes to their corporate earnings forecasts. Some, however, have gone so far as to suspend their outlooks.

“While earnings estimates continue to decline, forecasts remain too sanguine, with only 17% of analysts adjusting their numbers over the past 7 business days,” Credit Suisse’s Jonathan Golub observed on Monday.

And with earnings forecasts going stale, the global financial market rout has created the illusion that stock prices are cheap.

“Most equity markets, following the recent rally, are down only around 25-30% from their highs and these were highs not just in market levels, but also in valuation,” Goldman Sachs’ Peter Oppenheimer said in a note to clients on Tuesday. “While some valuation metrics have clearly come down from levels at the start of the year, the rally last week suggests that current market levels do not reflect the scale of EPS decline that we are forecasting.”

Unlike the average analyst expecting a 1% decline in S&P 500 earnings per share (EPS), Goldman Sachs strategists expect EPS will drop by around 33%.

Golub similarly attempted to derive a “fresh estimate” earnings forecast based on analysts who submitted revisions in the past week. And this effort still fell short of capturing his more dire earnings outlook.

“When only recently-updated ‘fresh’ numbers are included, EPS falls to $143.38, implying a -12.9% contraction,” Golub wrote. Still, Golub expects earnings per share will drop 24% to about $125 in 2020.