What Will Push Stocks Higher?
We have seen some good economic data in recent days, with the June factory sector ISM and payroll numbers showing impressive momentum. This is helping the market sustain its rebound from the March lows, with the S&P 500 index now just modestly in the red this year and the Tech-heavy Nasdaq composite in record territory, as the year-to-date performance chart of the two indexes below shows.
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Some folks legitimately worry that the momentum may not be sustainable in the face of the ongoing infection surge in the South and Southwest of the country that has started to weigh on the economy’s reopening.
This line of thinking suggests a lot more tentativeness on the economic horizon relative to what we are seeing in readings that predate the latest upsurge in infections. The market’s rebound from the March 23 lows has been very impressive, but performance over the past month has been less so, likely reflecting the aforementioned worry. The chart below shows the performance of these two indexes over the past month.
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The next catalyst for the market will most likely come from evidence that the U.S. economy is able to resume something resembling normal operations even as the country deals with the rebound in infections.
There are other issues as well, particularly the future of the fiscal relief that played such a major role in helping households and businesses navigate this tough period. My sense is that the market expects an extension of a big part of the fiscal relief as we get close late-July sunset unemployment top-up. But this is far from certain, given the disincentivizing effect that measure is believed to be having on the reopening effort. Policymakers will be walking a fine line as they contemplate these and other thorny issues in a hyper-partisan backdrop of approaching elections.
Needless to say, the future of the CARES Act could very well become an issue for the market in the coming days, which is closely tied to the reopening issue as well.
On the reopening front, the Q2 earnings season that really gets going in the coming days will offer more clarity as it will allow us to judge management’s plans for the second half of the year and beyond. We will most likely not get a lot of specific details, but the market will nevertheless find it reassuring if management teams can offer viable plans for how they see operating in the prevailing environment.
The actual Q2 earnings numbers, which have come down significantly already, will likely not matter that much. Earnings estimates have largely been stable lately, after falling sharply in March and April as the pandemic took hold. Full-year 2020 earnings estimates dropped from a roughly +8% growth in early January to a decline of -24.4% today. Estimates haven’t dropped much since mid-May, but they will likely start going down further in the coming days, particularly as companies report Q2 results and discuss what they see on the ground in their respective spaces.
The current state of consensus earnings expectations is captured in the following 5 charts.
The first chart shows how S&P 500 earnings estimates for full-year 2020 have evolved since early January. As you can see below, the expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -24.4% decline, down from -24.2% last week.
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The second chart shows how S&P 500 estimates have evolved for the current period (2020 Q2), which is expected to be the downturn’s bottom.
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The third chart takes a big-picture view of S&P 500 quarterly expectations, with earnings and revenue growth expectations for the next four quarters contrasted with actuals for the preceding four periods; expectations for 2020 Q2 have been highlighted.
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The fourth chart provides a big-picture view on an annual basis.
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As you can see above, growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +27.4% relative to 2020 estimates. But as strong as next year’s growth estimate is, total of 2021 index earnings would still haven’t gotten back to pre-COVID levels.
In other words, S&P 500 earnings in 2021 are currently expected to be modestly below the 2019 level, as the fifth chart below shows.
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These numbers translate to an index ‘EPS’ of $154.75 in 2021 vs. $121.50 in 2020 and $160.80 in 2019.
Q2 Earnings Season Gets Underway
The Q2 reporting cycle will (unofficially) get underway with the JPMorgan (JPM - Free Report) report on July 14th. But from our perspective, the Q2 earnings season has gotten underway already, with results from 17 S&P 500 out at this stage. These 17 index members - including FedEx (FDX - Free Report), Nike (NKE - Free Report), Oracle (ORCL - Free Report), Adobe (ADBE - Free Report) and others - reported results for their fiscal quarters ending in May, which we count as part of official June-quarter tally.
Walgreens (WBA - Free Report) and Paycheck (PAYX - Free Report) are the only index members on deck to report such May-quarter results this week. By the time we JPMorgan reports its Q2 results on July 14th, we will have seen such results from almost two dozen S&P 500 members.
For the 17 index members that have reported already, total Q2 earnings or aggregate net income is down -43.2% on -6.2% lower revenues, with 76.5% beating EPS estimates and only 47.1% beating revenue estimates.
This is too small a sample to draw any firm conclusions from. That said, the comparison charts below put these results in a historical context.
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The summary table below shows Q2 expectations in the context of what we saw in the preceding period.
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As you can see above, 15 of the 16 Zacks sectors are expected to have lower earnings relative to the year-earlier period, with 4 of the 16 sectors expected to lose money in Q2 (decline rates in excess of -100%).These four sectors are unsurprisingly Energy (Q2 earnings expected to decline -138.7%), Transportation (-154.5%), Autos (-231.6%) and Consumer Discretionary (-115%).
Finance and Technology, the two biggest earnings contributors to the S&P 500 index, are expected to show Q2 earnings declines of -39.5% and -13.4%. In fact, Tech’s -13.4% decline is the smallest earnings decline of the 15 sectors that will experience declines in Q2 (Utilities is the only sector that is expected to show a modest growth).
Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...
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There are many efforts to develop a working vaccine in process, and quite possibly a few breakthroughs already made. That is good news. The bad news is that the FDA has a long hard path to follow before any lives can be saved. Probably the most cruel part is that "double blind Test" where a large number of people who are confirmed affected are given either the cure or an ineffective fake, while all being told that they will be cured. So half are left to suffer and die while half may be saved.
The logic makes a bit of sense but the reality is horribly cruel. And the delay is many months.
Since all of the estimates for the future are not based on actual data, which does not exist yet, they are at best "happy wishes", and certainly not very solid. While the percentage of the population dying from this plague is small, the fear is very big now, the results of the openings so far are not encouraging. And the temporary relief brought by the fed pumping in money will definitely have a damaging effect of feeding inflation, even as it helps the wall street crowd produce some gains for the short term.
But if there is a second wave of infections then the second drop will not be so easy to fix. And possibly it will become clear to some folks that printing money is not the same as creating wealth. Am I the only one who understands that?? I certainly hope not.
I agree William.
I am hopeful at least a cure to help prevent Corona from killing people will come sooner rather than later. We will see if CytoDyn is a success very soon because they are first in line with FDA trials, one which rapped up recently and needs a formal review. There is also many drugs hoping to be a cure.
This nightmare will come to an end using science. The best many of us can do to help it is to financially support those seeking a solution, donating blood, and/or donating to those helping to treat or aid those suffering from the disease.
I'm confused how everyone is talking about a vaccine right around the corner. Everything I read said it takes about 20 years to develop a vaccine. Even if certain safety requirements are being disregarded, it would still take years, would it not?
CDCY is a treatment to prevent it from causing your body from over reacting to Covid although it may inhibit its growth and spread as well. So as we wait for newfangled attempts to make a vaccine without negative effects hopefully drugs like this will pan out making Covid less deadly.
Progress in little steps is often how we arise with a solution.
With almost 50 million people put out of work, by the insane and unconstitutional actions, of most of the country's mayors and governors, can anyone seriously consider the few million who have returned to work as "growth" in the economy? Wouldn't it be more accurate to wait until all those who lost their jobs, actually return to work, before talking about "growth". Recovery, to some degree, yes. Growth, no! The press and the politicians are doing a bang up job of: (1) Needlessly scaring the public senseless over "spiking" infection rates, which are mostly a result of increased testing, while actual death rates have fallen drastically. (2) Continuing to pump bullets into the corpse that was the greatest economy in the country's history, by senselessly burning more trillions of dollars, bringing the nation closer to bankruptcy/default than we've ever been before. (3) Allowing and even supporting rioters who are desperate to rewrite history, setting the stage for a civil/race war that the country may never recover from. Stalin is dancing in hell as he watches the USA destroy itself, something the Soviets could never accomplish when we were the "United" States of America. The only one's profiting as the market yoyo's are the brokers and some keen investors. The market is not an indicator of the state of the economy. It's a casino. Place your bets!
While I haven't agreed with much that you have to say on this site, I'd agree with this. But government's need their positive spin and that's all this talk of growth is.