Fed Saves The Day

Beginning of Earnings Season

The start of Q1 earnings season has been good because the firms reporting earnings ended their quarter at the end of February. They barely had any impacts from COVID-19 in their reports. This would have been a great quarter for firms if COVID-19 didn’t spread widely. With the first 14 firms reporting results, 93% of them have beaten EPS estimates on -1.64% growth. 86% of firms beat sales estimates on 5.59% growth. 

Keep in mind that when firms report their results that include March, they will also beat estimates because estimates will be lowered substantially. Firms almost always beat estimates. That’s why it’s important to look at absolute growth and the rate of change of estimates.

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As you can see from the table above, estimates have come down very sharply in the past few days. Now, Q1 EPS growth is expected to be -4.52%. That’s down 3.97% from the start of the month. There is no chance growth will be positive. It might end up worse than -5%. Q2 EPS estimates have crashed further, but have more to fall. They fell from 3.48% to -5.09% in 25 days. We should see estimates fall below -10% within the next week.

On the positive side, we can look forward to Q4 EPS growth estimates falling too far and analysts either raising them or firms beating them sharply. So far, growth estimates are still 4.49%, but in the next couple of months, we will see them crater. At that point, it will make sense to expect a positive catalyst because the economy might be recovering by then. 

Many investors are fully on board with the thesis that the economy will have a quick recovery. Especially based on the recent recovery in China and Wuhan opening on April 8th. New York should reopen in May.

Summary Of Fed’s New Policies

The main reason for being bullish is the Fed’s latest policy to buy corporate debt. It cancels out the uncertainty about the coronavirus. Is the coronavirus now contained because of the Fed’s policy? Absolutely not, but stocks have been falling because of liquidity issues that are being eliminated. 

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Disclosure: None.

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