The most significant US earnings season in over a decade kicks off today, and no one expects it to be pretty.
This second-quarter period covers the height of the economic lockdowns in the months following the outbreak of the coronavirus in the US in February.
Earnings at S&P 500 firms are expected to fall by 45%, the worst quarterly performance since the financial crisis when S&P 500 profits fell by 67% in the fourth quarter of 2008, according to Refinitiv I/B/E/S data.
The week kicks off with results from Pepsico on Monday, but will be dominated by big US banks.
JP Morgan Chase, Citigroup and Wells Fargo publish their numbers on Tuesday, followed by Goldman Sachs and Morgan Stanley on Wednesday, while Bank of America will provide some insight into what is happening on Main Street on Thursday.
Investors looking beyond earnings
The financial sector is expected to see a more than 52% decline in profits, according to Refinitiv.
Interactive Investor head of markets Richard Hunter says: “Investors will be looking out for the ongoing effects of historically low interest rates, any further bad loan write-downs, the outcome on extremely volatile markets on their trading units and, in some cases, which banks have seen the benefits of organising credit facilities for cash-strapped corporates.”
Pepsi, Delta, Netflix, Johnson & Johnson and BlackRock are among those reporting this week in a busy season that is set to last until mid-August.
The worst sectors are expected to be energy, with a decline of 154%, followed by retail, expected to be down by 114%, according to Refinitiv.
“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 Ally Invest. “But since so many companies aren’t giving earnings forecasts, investors won’t make moves based on earnings alone. They’ll also be looking at trends since the quarter ended. Increasing coronavirus cases, management outlooks, and price performance could all have an outsized impact, and that could lead to outsized market moves.”
Stay at home restrictions have clearly benefitted tech firms, with the technology-laced Nasdaq up almost 17% this year.
The months between April and June saw the market capitalisation of both Apple and Microsoft climb to $1.6trn. Amazon’s market value hit $1.4trn, which saw its share price top $3,000, an 82% jump since the March lows of equity markets. The value of Google owner Alphabet also nudged $1trn for the first time during this period.
Hopes for a rapid, pronounced V-shaped recovery in earnings have been one of the main reasons why equity markets have rebounded so quickly from their March lows.
The S&P 500 is only down just over 2% this year, making up some 40% on its March trough.
However, many other economists say a more gradual U-shaped or Nike swoosh-shaped recovery is likely.
But as the US, in common with several major nations around the world, faces recession, its markets remain detached from the real economy.