The one certainty about the outlook for companies in a COVID-19 world is that second-quarter earnings will be very bad — the worst, in fact, in more than 10 years.
Although Wall Street is betting that earnings will start bouncing off the bottom in the third quarter, the beginning point for that bounce is unknown, and early indications suggest the rebound’s magnitude may not match investors’ hopes.
As usual ahead of earnings season, since the reports cover the three-month period that has already passed, what companies say about the current quarter or the full year is more important than the results they’re reporting. But this earnings season may be different, as uncertainty over the impact of the COVID-19 pandemic has led many companies to withdraw guidance, leaving analysts more blinkered than usual when setting estimates.
About a third of S&P 500
component companies have pulled their financial guidance, and less than half the typical number of companies have so far provided quarterly updates ahead of earnings, according to Sebastien Leburn, senior portfolio manager at Boston Private. “There’s a deficit of information that needs to be filled at some point,” Leburn said in an interview with MarketWatch.
That puts the trajectory of the anticipated earnings bounce, which stock investors are banking on, on unsure footing.
“That’s why I think earnings will be very important, because they’ll provide a dose of reality,” Brad Cornell, professor emeritus of finance at UCLA, told MarketWatch. “They are going to tell us exactly whether a company is on a path that justifies this run-up.”
One aspect of the rally in stocks over the past few months is that it has been driven by a shrinking set of mega-capitalization companies expected to benefit in a post–COVID-19 world. All five of the most highly valued companies in the S&P 500 index — Apple Inc.
Google parent Alphabet Inc.
and Facebook Inc.
— have rallied by a double-digit percentage in 2020, while the S&P 500 has lost 2.6%.
‘That’s why I think earnings will be very important, because they’ll provide a dose of reality. They are going to tell us exactly whether a company is on a path that justifies this run-up.”
Those five companies have a combined weighting of nearly 23% in the index, according to FactSet. That increases the risk for the broader stock market, as it heightens the importance of the earnings performance of a smaller set of companies. Disappointing results from other companies viewed as post–COVID-19 winners could also sap the market’s strength.
It’s not just the results that matter; so will any financial guidance they can provide to help justify the stocks’ gains.
“It’s all about clarity and having some guidance,” said Boston Private’s Leburn. “Without that, you have nothing to work with.”
The bad news is the actual numbers
The second-quarter earnings reporting season for S&P 500 companies unofficially kicks off before Tuesday’s opening bell, when a number of banks reveal their results.
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The aggregate blended year-over-year growth estimate for earnings per share, which includes some earnings already reported and the average analyst estimates of coming results, is negative 44.7%, according to FactSet. That would be the biggest decline in earnings since the fourth quarter of 2008, when earnings fell 70% in the midst of the financial crisis. It would follow 1% earnings growth in the first quarter.
“Second-quarter earnings will likely be a ‘kitchen sink’ report from many companies,” said Marc Lichtenfeld, chief income strategist with the investment and business newsletter publisher the Oxford Club. “They can throw in all of their write-offs and other expenses and know they will likely be forgiven for an earnings miss due to the extenuating circumstances.”
The current estimate marks a sharp drop in expectations as the coronavirus pandemic took firmer hold: The estimate as of March 31 was for a decline of just 11.1%.
All 11 S&P 500 sectors are expected to suffer negative earnings growth, led by energy, where earnings are projected to have fallen 151.5%, and consumer discretionary, which includes Amazon, where a 118% decline is forecast.
Information technology, which includes Apple and Microsoft, is expected to show a 9.5% earnings decline, while communications services, which houses Alphabet and Facebook, is expected to fall 30.7%. The best performer is currently estimated to be the utilities sector, whose earnings are forecast to be down 3.3%.
The outlook for sales is much better, with analyst expectations pointing to an 11% decline overall, with health care and utilities are the two sectors projected to see year-over-year sales growth.
The outlook for the third quarter is also bleak, just not as bleak as the second quarter.
The blended earnings-per-share estimate is for a drop of 24.4%, which compares with expectations of a decline of just 1% as of March 31. That would mark a second straight quarter of negative earnings growth, which by definition would mark the kickoff of an earnings recession.
That implies a bounce that recovers less that half the earnings lost since the first quarter. In comparison, the S&P 500 has retraced about 81% of the COVID-19 selloff from the Feb. 19 record-high close of 3,386.15 to the March 23 closing low of 2,237.40.
Of the 11 S&P 500 sectors, 10 are currently projected to suffer negative third-quarter earnings growth, led by energy at down 113.7% and industrials at down 59.8%. The one sector expected to grow earnings is utilities, where a 0.3% earnings rise is foreseen.
Meanwhile, third-quarter sales are expected to decline at a 5.5% rate.
Winners and losers in a new world
Although the earnings outlook for the overall S&P 500 is uniformly negative, investors have made a clear distinction between companies expected to end up as winners in a post–COVID-19 world and those that will struggle.
Many believe the COVID crisis is creating a new world, while others believe the pandemic has just sped up the future.
“Historically speaking, crises have tended to accelerate macro trends already in place,” said Yancey Spruill, chief executive officer at DigitalOcean, a cloud infrastructure company. “The clear winners are enterprise technology companies whose infrastructure or software supports the shift to remote work environments and deliver services to customers in a low-friction manner through an internet-based interface.”
In this world, Spruill views Okta Inc.
and ServiceNow Inc.
as cloud productivity tools that will likely continue to see “impressive growth.”
“Coronavirus has split the stock market like never before,” said David Russell, vice president of market intelligence at TradeStation Group. “Large swaths of the S&P 500 and even some members of the Dow Jones Industrial Average
have become irrelevant as newer software companies break out.”
A good example is Zoom Video Communications Inc.
Russell said. The video meetings service, which went public just 15 months ago, has a market capitalization of about $78 billion, which is bigger than the market caps of two hotel stocks in the S&P 500 — Marriott International Inc.
and Hilton Worldwide Holdings Inc.
— combined, and bigger than the market caps of six Dow components, including Goldman Sachs Group Inc.
and Caterpillar Inc.
Investors also seem to be betting on socially conscious companies following environmental, social and governance, or ESG, criteria.
“We were already seeing a shift of money into ESG funds before coronavirus, and the trend has continued with an embrace of electric vehicles and solar energy,” Russell said.
Opinion:Coronavirus can shake up ESG investing — here’s what investors should demand
For example, Tesla Inc.
is not yet a member of the S&P 500, but with the stock more than tripling this year, the electric-vehicle maker’s market cap of about $276 billion makes it the 15th most valuable company in the U.S.
COVID trumps political unknowns
One potential headwind for the stock market is the cloud of uncertainty blanketing the political landscape, in terms of what shape the next stimulus package, if one emerges, will take in the shorter term, and the Nov. 3 presidential election in the medium and longer terms.
See:Goodbye, extra $600: Unemployment benefits won’t exceed former wages in next stimulus bill, Treasury’s Mnuchin says
“Politics will undoubtedly play a role in the outlook and guidance for Q3,” said Ken Van Leeuwen, managing director and founder of the financial adviser Van Leeuwen & Co. “The current news cycle has been dominated by COVID-19–related [developments] and social unrest, but we feel that the election will be in the spotlight as we get closer to November.”
This could make it difficult for companies to provide investors with the clarity they’re desiring. And a continued reluctance to provide guidance could shake the stock market’s foundation.
“The continued information deficit can’t get stocks in trouble,” said Boston Private’s Leburn.
Others believe that politics is just a sideshow that can create short-term volatility for stocks, while lasting impacts are unlikely. Especially in the current environment.
“[T]he tremendous health and economic challenges associated with the COVID-19 outbreak mean that election-related political uncertainty isn’t the primary concern of business leaders,” said Mark Hamrick, senior economic analyst at Bankrate. “They have other proverbial fish to fry at the moment.”
Cost cutting and capital raising
Investors can brace for a fresh round of cost cuts and capital-raising activity to accompany earnings reports, as companies move to bolster liquidity and preserve cash as revenue shrinks.
Companies in the hospitality sector — restaurants, hotels, airlines, and rental-car companies — are most at risk, said Anthony Denier, chief executive of Webull, a commission-free trading platform. “Companies related to sports, such as Madison Square Garden Sports Corp.
will also take a hit. Entertainment companies like casinos and anything that puts on shows where large groups of people attend will also be hit hard.”
The handful of companies that have already reported or updated guidance reflect the trend.
Walgreens Boots Alliance Inc.
announced it plans to cut 4,000 jobs in the U.K., and United Airlines may furlough or fire up to 36,000 employees once the federal rules for accepting pandemic money expires on Oct. 1.
“This could expand throughout the entire airline sector,” said Denier. “AT&T also said it may cut jobs and close stores. Again, this might be a harbinger for the rest of the telecommunications industry.”
‘There’s so much liquidity and capital to put to work and so much trading on short-term trends and issues. It belies the underlying weakness and problems to come and it’s whitewashing many of those problems.’
Other companies to shrink head count include jeans maker Levi Strauss & Co.
audience-measurement company Nielsen Holdings PLC
motorbike maker Harley Davidson Inc.
and hamburger chain Shake Shack Inc.
which has failed to fully offset restaurant closures with delivery and pickup.
James Gellert, CEO of Rapid Ratings, a data and analytics company that assesses the financial health of private and public companies, said the quarter will reveal just how much companies have been destabilized by the pandemic — and it won’t be pretty.
Rapid Ratings conducted stress tests on 40,000 public and private companies, reviewing their financial health ratings prior to their first-quarter earnings releases to establish a true pre–COVID-19 perspective and measure how much they deteriorated after stay-at-home orders were put in place.
The stress tests showed deterioration in core health, which looks at longer-term stability, while shorter-term financial health ratings were not as badly impacted, “but I suspect after the second quarter we will see a precipitous decline in both,” said Gellert.
Overall, companies increased leverage, while revenue and profitability declined. That means higher interest costs but lower interest coverage amid a reduction in cash from operations.
“That combination of factors sets the stage for an enormously impactful second quarter,” he said.
Even after raising money at record rates, companies are expected to continue to issue debt, equity and convertible bonds in the coming quarters, as long as capital markets remain open.
U.S. companies issued a stunning $1.09 trillion of corporate bonds in 909 deals in the year through July 10, according to data provided by Dealogic. That shattered the previous record of $670.7 billion in 664 deals issued in 2015.
Companies issued $252.2 billion of equity in 659 deals, the Dealogic data show, trouncing the previous record of $206.1 billion in 599 deals issued in 2000.
Convertible bond issuance also set a record, of $180.4 billion in 543 deals, breaking the previous mark of $185.9 billion in 550 deals set in 2000.
“There’s so much liquidity and capital to put to work and so much trading on short-term trends and issues,” said Gellert. “It belies the underlying weakness and problems to come, and it’s whitewashing many of those problems.”
Crucially, buoyant capital markets are not reflecting the underlying weakness to come and the problem of long-term destabilization. “Nobody should equate strength in the S&P 500 with underlying corporate strength,” Gellert said.
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Marseille in California. ″Where the Portuguese is, there is Portugal″
“You are the future,” President Marcelo Rebelo de Souza told a three-year-old girl dressed in traditional Portuguese clothing who came out to greet him on the podium where he spoke at Artesia Portuguese Salon. The city, located on the outskirts of Los Angeles, has not hosted the President of the Portuguese Republic since 1989. This weekend, he did it with pomp and the setting of an ornate Portuguese-American community bursting with pride.
“We have never lost the honor and responsibility of being representatives of this beautiful flag,” said Jimmy Enes, a member of Artesia DES, a Portuguese descendant, in a welcoming speech delivered in perfect Portuguese. “When we are asked who we are, we always answer”i am portuguese“and not”Portuguese-American“or ‘Portuguese American’,” he said. “That’s why we’re trying step by step to protect our heritage on the outskirts of Los Angeles, one of the greatest cities in the world.”
Artesia was one of the stops during President Marcelo Rebelo de Sousa’s visit to California, which was the largest head of state trip since Mario Soares welcomed West Coast communities 33 years ago.
The hall received the President during the Festa dos Santos Populares, which he organizes every year in September and this time also celebrates the 50th anniversary of the Banda Filarmónica de Artesia. Dozens of musicians and dancers marched through the atrium, singing songs in Portuguese, as residents alternated between clapping their hands and tasting sardines. Marcelo Rebelo de Sousa exchanged words and took pictures with the Portuguese Americans. “It’s unusual, the president is always with the people,” Steve Miranda, president of the board of Artesia DES, told DN. “I think it touched everyone’s hearts.”
Zeto Carvalho, adviser to the Azores diaspora and head of SATA Air Açores, stressed the same. “This event is important and of great importance, because the emigrants feel welcome when the president comes here and demonstrates what he has shown here, this affection,” he told DN.
The president promised a visit in 2018 and is doing so this week, at a time when ties between California and Portugal are stronger than ever.
“The Portuguese presence in California, on the one hand, combines exemplary integration, and on the other hand, the spirit of association and connection with Portugal, which is in full view,” said Consul General of Portugal in San Francisco Pedro Pinto. . “Today Portugal is here.”
Located about thirty kilometers from downtown Los Angeles, Artesia has a Portuguese community of several thousand, mostly from the Azores. Surnames such as Rodriguez or Silva are often seen on the shutters of the villas around the hall, and the nearby church of Sagrada Familia still holds a weekly Mass in Portuguese led by Father Luis Proenza.
“Divino Espírito Santo de Artesia, in existence for nearly 100 years, continues to be a model community in the state with the largest Portuguese presence in the US,” said Jimmy Enes. California is, in fact, the state where the most Portuguese – 347 thousand. Accompanied by deputies Eurico Brillante Diaz (PS), Joao Moura (PSD), Rui Paulo Sousa (Enough) and Pedro Filipe Soares (BE), this delegation visits several of these communities, from San Diego and Artesia to San Jose, San Francisco, Gustin and Turlock.
The geographic dispersion in the giant state and the considerable distance to Portugal, with a single direct 10-hour TAP flight between San Francisco and Lisbon, makes maintaining connections difficult. Therefore, the president especially noted the work of the Portuguese salons in California, including Artesia.
“I am happy because you are a great example. So far away from Portugal, you are Portugal,” the President said in a speech almost entirely in English. “We want you to be Portuguese living in the United States, as Americans, never forget that you are Portuguese,” he continued. “I am so proud of you and this association. What you do here year after year.”
The head of state highlighted the number of young people in the Philharmonic Orchestra and in the hall, as attracting new generations of Portuguese descendants is one of the issues that most concern the communities. And he talked about the importance of learning the language, “the fifth most spoken in the world,” which is a constant demand of community leaders.
“We have to improve our Portuguese language skills,” he stressed, pointing to the work being done with the new superintendent of the Los Angeles Unified School District, Portuguese Alberto Carvalho, who was present at the event.
The Secretary of State for Portuguese Communities, Paulo Cafofo, who encouraged associations to apply for new support for associativism, also mentioned this aspect. “The Portuguese government is actively promoting the Portuguese language,” he assured.
For Paula Rocha Diaz, a Portuguese translator who emigrated to Oceanside for 14 years, this is a key moment. “I would like to strengthen the teaching of Portuguese so that the children who grow up here do not lose the language, as happened to my daughter,” he told DN. “Today, for the first time, she said that she was a Portuguese-American,” she said, demonstrating her emotion at being able to sing the Portuguese anthem with her compatriots. “I liked that the president reminded us that we are all part of the Portuguese pride and even though we are far away, Portugal is still in our hearts.”
According to Steve Miranda, with an estimated turnout of 500 to 700 people, the party at Artesia “was a huge success”. Necessary: ”We need to create this enthusiasm so that the younger ones continue to engage in our culture.”
The President understood the task, giving out hugs and listening to the numerous stories of emigrants. “Where the Portuguese is, there is Portugal,” he said. “Wherever we go, we take our soul, our traditions with us.”
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Cristiano Ronaldo is injured by the Portuguese national team and thanks the fans for their support
Gratitude. It seems that the attacker Cristiano Ronaldo shared his social media with Portuguese fans after a clash with Czech goalkeeper Vaclik. In the auction, the assailant received a cut on his face and needed a bandage to stop the bleeding.
“Great game, important team win! We remain focused on our goal. Thanks to the Portuguese public for the fantastic support,” the striker wrote on his Instagram account.
The match was marked by a great performance Portugal national team, who beat the Czech Republic 4-0 to take the lead in Nations League Group 2 with ten points with one matchday to go in the group stage of the tournament. Cristiano Ronaldo ended up losing to his team.
After the match, the leader of the Portuguese national team appreciated the result achieved on the road. “It was a very important victory and all teammates should be congratulated on the result,” commented the 37-year-old striker.
With three wins, one draw and one defeat, the Portuguese team has the best attack in their group with eleven goals scored and a net difference of nine. The team is one draw away from qualifying for the tournament series. The next match against Spain is next Tuesday in the city of Braga.
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