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JPMorgan Chase kicks off earnings season on Tuesday. The bad news: Short-term guidance will be very ugly.
But there’s some good news:
1) The Securities and Exchange Commission has told corporations that this earnings season is not routine and has encouraged companies to provide forward-looking guidance, and not be concerned that the information may change rapidly. This will make executives far more comfortable to comment freely on what is happening without fear the SEC will come down on them if they change their forecast a few weeks later. Expect a lot more detailed commentary.
2) Markets are stabilizing as top-down, and macro strategists are beginning to feel more confident even though 2020 estimates will be down 20% to 30% from 2019. While this is a shocking decline, these top-down strategists were clueless even a few weeks ago. That their long-run estimates (guesses, really) are coalescing around a common range is a good sign Wall Street is starting to get its head around the magnitude of the decline, the first step in figuring out rational pricing.
Here’s what we might expect to hear from corporations when they begin reporting. I’ve broken it down into sectors to make it easier to digest. While I have spoken to many traders over the past several days, the observations are my own.
Lower rates and a flatter yield curve will be a major problem.
Federal Reserve loan programs may help a bit, but regular loan demand from corporations certainly will be lower. Consumers may use draw-downs on home equity loans.
There will be higher provisions for credit losses. Regional banks have particularly large exposure to restaurants, energy and other small businesses.
Asset management also will be hit as lower demand for financial services and lower markets mean lower fees.
This sector is likely to see the largest year-over-year declines in earnings, more than 50%.
Output cuts by Saudi Arabia and Russia will not enough to offset a near-complete collapse in global demand for oil.
Lower prices will be of no benefit to refiners because no one is driving.
A massive pullback in capital spending is expected.
Many companies will reduce or eliminate dividends.
Among U.S. shale producers, a wave of smaller-company bankruptcies expected.
This sector was weak before coronavirus due to the effect of tariffs and Boeing woes, then came the global supply-chain disruption that began in China in January.
Aerospace and defense were especially hit hard.
Pricing is weak.
There is much lower global demand for chemicals, metals and mining.
The Russia-Saudi Arabia oil war also impacts chemicals with lower prices.
Consumer demand is lower.
Smartphone, computer sales are likely to decline, but gaming sales remain strong.
Semiconductor sales are likely to decline again in 2020.
Cloud investment is likely to remain strong.
Software-as-a-service and other platforms that have migrated to the cloud may hold up better.
Real Estate Investment Trusts
Health care: Primarily senior housing, it faces a significant risk from the coronavirus.
Apartments: Rental income will be disrupted, but expanded unemployment and small business loans will help.
Retail: Those with exposure to grocery stores will do better, but for others the choice of taking no rent or forcing evictions may be the final straw.
Entertainment: Workforce reductions will not overcome closing of theme parks, movie theaters, sports events.
Media companies: There’s more viewing, but advertising is challenged, and many are still facing continuing loss of subscribers (but broadband still growing).
Competition is still driving costs higher.
For some (Disney), digital subscriptions are an offsetting plus.
Autos: A huge drop in sales in all major markets (China, Europe, U.S.), is offset by higher demand for auto parts and record-high vehicle age.
Homebuilders: Weak consumer confidence will delay first-time and move-up buyers, permits and new orders declining rapidly. Shutdowns of construction. Prolonged shutdown could interrupt building material supplies. Expect drastic cutback in land inventories (2008 playbook).
Travel and leisure: Mass cancellations for hotels, airlines, cruise ships resulting in enormous revenue losses combined with still-high fixed costs, even with layoffs.
Supermarkets, food retailers, packaged foods: All are benefiting from the work-at-home trend; commodity inflation (packaging costs) is much lower.
Household products: Enormous demand for cleaning products, toilet paper, paper towels.
Personal products: Some demand but duty-free sales evaporated and department stores were closed.
Food distribution: Hurt due to restaurant, hotel, school closures.