Corporate Earnings & The Coronavirus Pandemic

Mr. Market would like to know the full earnings impact of the ongoing coronavirus pandemic. Knowing that critical piece of information will go some way toward determining a ‘fair value’ for stocks and put an end to the day-to-day roller-coaster ride that daily market action has effectively become.

Calculating the pandemic’s earnings impact is no simple matter. At a minimum, we need to know how long will the pandemic last, without which it is impossible to know when ‘normalcy’ will return to our lives and businesses will reopen.

Unfortunately for us, the coming 2020 Q1 earnings season, which gets underway with the April 14^th releases from JPMorgan (JPM) and Wells Fargo (WFC), will not give us the clarity that we need. The reason for that is these companies are as much in the dark about the economic horizon as the rest of us.

The clouds will start lifting once we gain visibility on the pandemic’s duration, which hit Q1 only partially and is expected to ‘peak’ sometime toward the end of this month or next. The hope is that the worst takes place in Q2, with normalcy returning in Q3 and beyond. We have been seeing the effect of this outlook in how estimates have evolved in recent days and weeks, as the charts below

The first chart is showing how growth expectations for 2020 Q1 have evolved since the quarter got underway.

As bad as the Q1 revisions trend above looks, the situation is worse for the current period, as the chart below shows.

The chart below looks at Q1 expectations in the context of what was achieved in the last few quarters and what is expected beyond 2020 Q1.

As you can see above, the first three quarters of 2020 are now in negative territory, with the last quarter as the only period with positive growth at this stage.

The chart below puts earnings and revenue growth expectations for full-year 2020 in the context of where growth has been in recent years and what is expected next year.

You can see here that full-year 2020 is now in the negative, both for earnings as well as revenues, primarily reflecting the pandemic’s impact. Growth is expected to resume next year and continue the following year.

It is reasonable to be skeptical of these consensus expectations given the all-around uncertainty about the economic impact of this outbreak. That will likely change only once visibility on containment of the pandemic improves, which will enable companies to get a handle on the full extent of their exposure and the pandemic’s macroeconomic impact.

Early 2020 Q1 Scorecard

The aforementioned JPMorgan (JPM) and Wells Fargo (WFC) reports would not really be the first Q1 results, as the reporting cycle has ‘officially’ got underway already, with results from 20 S&P 500 members out at this stage. All of these companies have reported results for their fiscal quarters ending in February, which we count as part of our March quarter tally. These early reporters include a number of bellwethers like FedEx (FDX), Nike (NKE), Costco (COST) and others that follow this reporting format.

Total earnings or aggregate net income for these 20 index members that have reported already are down -8.9% from the same period last year on +5.2% higher revenues, with 80% beating EPS estimates and 70% beating revenue estimates.

The comparison charts below put the results from these 20 index members in a historical context. The first set of two charts compare the earnings and revenue growth rates for these companies.

The second set compares the proportion of these companies beating EPS and revenue estimates.

For Q1 as a whole, combining the roughly three dozen companies that have reported results already with estimates for the wide majority of still-to-come results, total earnings are expected to be down -7.1% on +2.3% higher revenues.

The table below shows the summary picture for Q1, contrasted with actual results in the preceding period. We have underlined the sectors with the biggest declines in Q1.