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Prepare for more quarters of bad news
Companies comprising around 15% of the S&P 500’s market cap have announced their first quarter results.
According to analysis from Credit Suisse, earnings are missing analysts’ estimates by 6.3% in aggregate. But as Morning Brief readers already know, this is largely due the fact that many of these analysts’ estimates haven’t been revised since before the coronavirus pandemic turned into a global economic crisis.
One of the major reasons why analysts have been reluctant to change is that many companies have either suspended or withdrawn guidance going into earnings season. And they continue to do so frequently as earnings season rolls along.
“80 S&P 500 companies have now suspended guidance amid uncertainty around COVID-19,” Bank of America’s Savita Subramanian observed on Monday. Regarding what that means for analysts, she added, “Estimate dispersion remains near record levels.”
And when analysts don’t have guidance, they tend to be conservative when it comes to forecasting bad news.
“Our work indicates that in the absence of guidance, analysts will not fully mark down earnings estimates,” Credit Suisse’s Jonathan Golub said. “Put differently, lack of guidance should leave estimates too high for future quarters, even after Q1 reports.”
In other words, expect more worse-than-expected results in the quarters ahead.
On the one hand, who cares? “Beats” and “misses” often say more about analysts’ relative accuracy than the actual news a company may reveal.
On the other hand, both Golub’s framework that bad corporate news reported over the next few weeks will still greatly undersell the damage to profits that will be seen over the balance of this year.
Actual bad news is coming
In fits and starts, the U.S. economy will reopen. And if we want the economy to be great again, we’ll need consumers and businesses to resume the investment and consumption habits that prevailed before this pandemic.
Unfortunately, the early read isn’t promising: Corporate America is battening down the hatches.
“We expect S&P 500 capex will fall by 27% to $534 billion during 2020,” Goldman Sachs’ David Kostin wrote on Friday. “Sell-side analyst estimates revised during the past 45 days indicate S&P 500 capex likely fell by 5% year/year during 1Q. We expect a 33% decline during the remaining three quarters will result in a 27% full-year drop.”
Some of this behavior comes down to management’s desire to beef up balance sheets. But it’s also due to the fact no-growth and slow-growth economies come with limited business investment opportunities.
Fiat Chrysler plant in Illinois idles after the auto industry shuts down due to coronavirus. (Getty)
As Tyro Partners’ Dan McMurtrie tweeted, an economy on the mend needs investment in things that may yield low returns. This is really a job for the government, not the private sector.
Because during a time when business investment couldn’t be more helpful to the economy, businesses are planning to do the bare minimum. The returns just aren’t in it for them right now.
And the cash companies are saving by curtailing investment isn’t being deployed elsewhere. Kostin estimates R&D spending will fall 9%, share repurchases will plunge 50%, cash dividends will decline 23%, and cash M&A spending will fall 49%. Altogether, Kostin estimates cash usage among S&P 500 companies will drop 33% to $1.8 trillion in 2020.
McMurtrie warns that the “market is behind the unfortunate realistic base case for normal economic activity being Q3 2021,” which is when a COVID-19 vaccine could be readily available. He adds that there’s likely to be “a lot more unemployment and and a lot of insolvency between here and there.”
It can be productive to talk about reopening the economy and guesstimating a future path for earnings growth. But we should also be thinking about what it’ll take to reactivate the economy. And how far away we might be from really getting there.
10 a.m. ET: Existing Home Sales, March (5.28 million expected, 5.77 million in February); Existing Home Sales month-on-month, March (-6.8% expected, +6.5% in February)
Earnings
Pre-market
6:55 a.m. ET: Coca-Cola (KO) is expected to report earnings of 44 cents per share on $8.49 billion in revenue
President Donald Trump speaks about the coronavirus in the James Brady Press Briefing Room of the White House, Monday, April 20, 2020, in Washington. (AP Photo/Alex Brandon)