The Q1 earnings season ramps up this week in a big way, with more than 250 companies on deck to report quarterly results, including 72 S&P 500 members. This week’s line-up includes a number of bellwethers like Netflix (NFLX), IBM (IBM), Intel (INTC), Southwest (LUV) and others that will add further color to our understanding of the pandemic’s earnings impact.

All of us appreciate that it is an evolving picture whose full details will unfold only over time. Importantly, the numbers will get bad in the current period (2020 Q2), really bad, before they start getting better.

We are starting to get some sense of how bad things will get from economic data that has been coming out in recent days. But even most of that data like Retail Sales, Housing Starts, Industrial Production and others pertain to March, which is only partly relevant to what the economy is experiencing currently.

That said, relatively high-frequency releases like the weekly Jobless Claims numbers and many of the regional Fed surveys come as close as possible to give us a real-time view of the economy. The picture coming out of all of these releases, including earnings reports, is bleak.

To get a sense of this evolving earnings picture, take a look below at how earnings estimates for the June quarter have evolved over the last couple of months.

As you can see above, the negative revisions trend has accelerated in recent days, a trend that we expect to see continue as more companies report Q1 results and discuss trends in their businesses. We are seeing something similar at play in estimates for full-year 2020 as well, as the chart below shows.

Market Looks Past Ugly Data

This run of bad and worsening economic and earnings data appears out of sync with the stock market’s recent behavior, with the major indexes making impressive gains over the last few weeks, as the chart below of the year-to-date performance of the S&P 500 index and the Nasdaq Composite shows.

As you can see above, the S&P 500 index (blue line above) has recouped more than half of the losses it suffered from its peak on February 19 thorough the March 23 bottom. The Tech heavy Nasdaq Composite index (red line above) has done even better.

So, what gives?

At the March 23 bottom, the S&P 500 index was down about -35% from its February 19 peak, with the index level reaching about where it was around Christmas 2018 when it started a sharp rebound. Stocks typically lose about a third of their value ahead of a recession and since we are heading into a major economic downturn, the -35% peak-to-trough travel puts us in that historical range.

We should also keep in mind the nature of this coming recession and how it is different from any other economic downturn that the economy has suffered in recent decades. Even more importantly, the magnitude and speed of policy response, both fiscal and monetary, is extraordinary and effectively open ended.

Given all these reasons, it is perfectly reasonable for the stock market, which is always a forward-looking pricing mechanism, to look past the current and coming set of ugly economic and earnings data and look ahead to some future period of normalcy or ‘new normalcy’.

It is possible that the stock market may optimistically overshoot in interpreting real-time data about the pandemic, headlines about therapeutics and even the duration and depth of the economic hole. But I find it hard to believe that this economy, which was structurally sound in every meaningful way before the pandemic arrived, will struggle to revive once we learn to live with the virus for some period of time before putting it behind us.

Q1 Earnings Season Scorecard

As of Friday, April 17, we have seen Q1 results from 47 S&P 500 members or 9.4% of the index’s total membership. With another 72 index members on deck to report results this week, we will have seen Q1 results from almost 24% of the index’s total membership by the end of this week.

Total earnings or aggregate net income for these 47 index members that have reported already are down -31.1% from the same period last year on +2.9% higher revenues, with 68.1% beating EPS and revenue estimates.

The comparison charts below put the results from these 47 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.

The Finance sector is heavily represented in the result thus far, as is typically the case at the start of every quarterly reporting cycle.

For the Finance sector, we now have Q1 results from 34.4% of the sector’s total market capitalization in the S&P 500 index. Total earnings or aggregate net income for these Finance companies are down -51.3% from the same period last year on -1% lower revenues, with a very low 47.1% beating EPS estimates and 64.7% beating revenue estimates.

This is a far weaker showing from the group relative to what we have been seeing banks report in other recent periods, primarily reflecting the group’s cyclical exposure to deteriorating credit conditions as a result of the ongoing economic downturn.

For Q1 as a whole, combining the 47 companies that have reported results already with estimates for the wide majority of still-to-come results, total earnings are expected to be down -14.1% on +1.2% 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.