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Don't Be Fooled By the Strength Of Q2 Earnings

By Michael KramerStock MarketsJul 31, 2020 05:24AM ET
www.investing.com/analysis/dont-be-fooled-by-the-strength-of-q2-earnings-200532561
Don't Be Fooled By the Strength Of Q2 Earnings
By Michael Kramer   |  Jul 31, 2020 05:24AM ET
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This article was written exclusively for Investing.com

Earnings season has been moving along briskly, and so far, it has been better than feared. That may not be saying much, considering expectations for the second quarter were already so low and anticipated to be horrendous. But more importantly, expectations for future quarters, at least until now, have shown some signs of stabilization—that is, they have stopped falling.

But not all is rosy, because the tone from some companies has been one of concern surrounding the economic outlook. Even the Fed pointed to signs of a slowing recovery at its latest FOMC press conference, as initial claims on July 30 showed job losses are once again trending higher.

Weekly Initial Jobless Claims
Weekly Initial Jobless Claims

Lowered Expectations

According to data provided by Thomson Reuters, 45% of the companies in the S&P 500 have reported results, with 81% of them beating analysts consensus estimates, while 18% have missed estimates, and 1% have met. It may not be saying all that much. After all, earnings estimates for the second quarter have fallen roughly 48% since the start of 2020 to $22.59 as of July 23, according to data from S&P Dow Jones. It is a decline of almost 44% from the second quarter a year ago.

But the good news, at least for now, is that earnings estimates for the third and fourth quarters have improved recently. Currently, the third quarter is forecast to have earnings of $31.26, while the fourth quarter is expected to be $35.88. That is better than the estimates of $30.89 and $35.74, respectively, as of June 30.

Slower Path

Still, some companies have noted, they are not as optimistic about the path of the economic recovery and see it potentially taking longer-than-expected. And this degree of pessimism spans the various sectors of the stock market. For example, on the earnings call for Anglo-Dutch consumer goods maker Unilever (NYSE:UN), a defensive stock, the CEO noted that a quick recovery is on the optimistic side. That a deep global recession has already started, as consumer habits have already changed. Boeing (NYSE:BA), one of the ultimate cyclicals, also indicated on its call that the recent uptick in COVID-19 cases had slowed the recovery, and any improvement may be uneven.

Continued Jobless Claims
Continued Jobless Claims

Additionally, there has been some economic data recently that suggests the pace of the recovery is slowing from the initial "post-lockdown boom" seen a couple of months ago. Recent data from the NY Fed Weekly Economic Index shows a flattening of activity since the first week of July. Also, the initial claims data has shown the number of people filing for unemployment benefits for the first time has risen over the past two weeks. Finally, the number of people continuing to receive unemployment benefits also rose for the first time since April this past week, at almost 17 million.

Weekly Economic Index
Weekly Economic Index

Two Paths

For now, there appear to be mixed signals regarding the pace of the recovery and how that may translate into corporate earnings. It could suggest that either earnings expectations for the second half of 2020 are too high and need to fall. Or that the concern over the resilience in the economic recovery will fade and allow a stronger rebound to take hold.

Investors will have a lot to weigh once earnings season ends. Factor those results with the lack of clarity around the economic recovery along with the current valuations in the market, and it could make for some choppy weeks to come.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Don't Be Fooled By the Strength Of Q2 Earnings
 

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Don't Be Fooled By the Strength Of Q2 Earnings

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Comments (11)
Jeff Becker
Jeff Becker Aug 02, 2020 11:24AM ET
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The economy/markets are dependent on the government. Like an addict they need their fix. Eventually, it’s cold turkey or the grave.
Unoqueva Alguno
Unoqueva Alguno Aug 01, 2020 4:08AM ET
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Great article. If stocks were not at ATHs it could be sustainable but at this levels of valuation it will crash for sure before the end of 2020. Too much hopes for a fast recovery that is now becoming evident is not going to take place.
William Smith
William Smith Jul 31, 2020 2:25PM ET
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When the 2and wave hits in Oct/Nov the markets will once again collapse .
Michael Gabbert
Michael Gabbert Jul 31, 2020 2:25PM ET
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Your a joke hop on the bull train brother
Kamogelo Radinne
Kamogelo Radinne Jul 31, 2020 2:25PM ET
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covid bust no more Waves and hits back to normal
Anand Singh
Anand Singh Jul 31, 2020 1:24PM ET
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Very thought provoking article. Thank you!
Vv Pp
Vv Pp Jul 31, 2020 8:38AM ET
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great article again! Thanks
Souvik Chatterji
Souvik Chatterji Jul 31, 2020 8:36AM ET
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Market may go sideways but a fall is highly unlikely. Q1 earning were already factored in march 2020 steep fall and market will go sideways due to slight recovery in Q2. stop trying to create panic market is in a bull run and covid is just a deep correction nothing else
Nitin Sharma
Nitin Sharma Jul 31, 2020 8:36AM ET
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but chatterji saab look at ur frds... how many of them buyingcars or House& judge urself state of banks
Dean Butler
Dean Butler Jul 31, 2020 7:55AM ET
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Eranings are good because in part expenses (i.e payrolls) have been reduced due to reduction in workforce. You should note revenues for the most part down.
Michael Gabbert
Michael Gabbert Jul 31, 2020 7:51AM ET
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Coming from the same guy who said a crash is coming🤣 the market is rigged for a bull run and will continue to the next quarter. Why would u think the expectations for the companys next results would be better they will make sure that most companys beat expectations to keep the run going horrible article again
Ryan Curtis
Ryan Curtis Jul 31, 2020 7:51AM ET
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Go back to Stock Twits with the negativity. Mike simply shared some multi sided conjecture on the topic. I don’t see how the markets being manipulated upwards is ol’ Michaels fault here. And I do agree its rigged.
Latisha Pinnington
Latisha Pinnington Jul 31, 2020 7:48AM ET
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Great headline
Jeff Becker
Jeff Becker Jul 31, 2020 6:43AM ET
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We have a slew of talking heads telling us to buy and how its just around corner going on 5 months of doing so from their homes.
Ron Love
Ron Love Jul 31, 2020 6:43AM ET
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The worst quarter was Q2 and rebounding from there, thats why everyine is talking long-term buy.
Peter Robinhood
P_Robinhood Jul 31, 2020 6:43AM ET
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Ron Love  But the current price already priced in the next 10 years grow lol
Jeremy Williams
Jeremy Williams Jul 31, 2020 6:43AM ET
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Ron Love the worst quarter was priced in on a best case scenerio. We are by no means in a best case scenerio!
Sharath K S
Sharath K S Jul 31, 2020 5:54AM ET
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nice article and balanced
 
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