July 13, 2020 - Earnings season begins this week. By any traditional measure, the results are going to be grim.
The vast majority of companies are unlikely to show growth from either the prior quarter or the year-ago quarter.
This quarter will be a good test of how accurate analysts can be as they are working without guidance for hundreds of companies.
It's likely that barring major surprises, the market isn't going to care very much about the second quarter's results. We know that millions of people are unemployed and large sections of the country, and economy, were shut down for parts of the quarter and we've known it for months.
The market really only cares about the future. Since we don't know the future, we frequently make assumptions about the future based on the past. This is the case with both technical analysis, and fundamental analysis. It's easy to understand how using a chart to determine trends is using the past to predict the future. Making revenue and earnings estimates based on past growth rates is a very similar practice--you have a number of historical points and extrapolate forward from there.
So what are we going to look for in this season's earnings reports?
Any insight about current business conditions or hints about the future. In some cases this might be explicit, as CEOs often give a little bit of "color" about the current quarter on their conference calls. In other cases it might be things like, earnings for one company not being as bad, or as good, as the results for peer companies.
Given that the real uncertainty about the future is much less about how any particular company is doing right now and much more about the trajectory of the coronavirus pandemic, even getting a handle on which companies are performing relatively well isn't but so instructive about the future.
This leaves traders in an interesting spot. Instead of trying to make guesses about what the data will be, and assuming the market's reaction from there, this quarter is very much going to be about trying to judge how the market is going to react to the flow of news.
We've already seen a big divergence in markets, with five giant companies dragging the major indices higher, while whole sectors flounder near their post-crash lows.
Will anything in these quarterly reports support the lofty valuations for these five companies?
Will there be indications that the less-loved parts of the market should be higher?
We don't expect clear answers, but the flood of earnings reports will almost certainly contain hints and patterns that we'll be keeping an eye out for.
Economic Events this WeekTuesday
- 8:30 a.m. - CPI
- 8:30 a.m. - Export Prices / Import Prices
- 8:30 a.m. - Empire State Manufacturing
- 9:15 a.m. - Industrial Production/Capacity Utilization
- 8:30 a.m. - Initial Claims
- 8:30 a.m. - Retail Sales
- 8:30 a.m. - Philadelphia Fed Index
- 10:00 a.m. - Business Inventories
- 8:30 a.m. - Housing Starts
- 8:30 a.m. - Building Permits
- 10:00 a.m. - U. of Mich. Consumer Sentiment