Earnings season kicks off this week, and although we’ve seen a few economic data releases, earnings announcements will offer a lot of information about how the coronavirus is impacting companies.
Right now, according to FactSet, earnings are expected to be lower by 10 percent compared to the first quarter last year. If that’s the case, it will be the largest year-over-year decline since the third quarter of 2009, when the loss was -15.7 percent.
Looking forward, analysts predict earnings will even more in the second quarter, improve somewhat in the third quarter and will be flat in the fourth quarter. In total, investors expect earnings to be lower by -8.5 percent in 2020 than they were in 2019.
How the actual results compare to these estimates will have a huge impact on market prices in the coming weeks. We often say that markets ‘price in’ certain information, like earnings.
So, if a company made $10 million in profits this quarter, and was expected to make just $5 million in profits this quarter, the markets have ‘priced in’ a 50 percent cut to profits. The market already ‘knows’ that profits will get hurt and have set the market price based on a 50 percent decline.
When the company actually announces earnings, the market will have new information to set the reset the price.
And, you guessed it: if the company loses less than the market expects, the market price will rise (often substantially), and if the profits are less than expected, the market price will fall (again, often substantially).
So, the big test for the market is whether those estimates are too high, too low, or just right. And, in truth, the answer is will be all three across all of the individual stocks in the market.
We often talk about ‘the market’ as a monolithic thing, but it’s a collection of 30, 500 or 1,000 companies depending on what index you’re using.
And, investors being as fickle as they are, they might get overly excited after the first bank reports better-than-expected earnings only to get overly depressed when the rest of the banks underperform expectations.
In short, the wild ride isn’t close to over. It surely feels good to have a nice rally like we have had over the past few weeks, but there will continue to be plenty of volatility as we get new information dripped out, day by day, on the state of each company in ‘the market.’