Earnings season has officially kicked off but this is far different than the usual quarterly reports. This may be the most important and unpredictable earnings season in quite some time. Everyone is prepared for the vast majority of earnings to be down both from the previous quarter and the year ago quarter, so the market will have already priced this information in.
So if growth is off the table, what should investors be looking for this quarter?
Competition
What makes this earnings season so important though is how companies perform relative to their peers during the pandemic.
First quarter reports already showed some of this data but most of that quarter was before the effects of COVID-19 were fully realized. Many firms were still providing guidance at that point and the quarter only included about one month of a partially quarantined economy. How companies performed in an increasingly tech-dominated, remote-work economy with minimal retail activity will be a major point of interest this quarter.
This quarter's performances should go a long way toward showing how certain stocks will perform in the future as good management is going to play a major role in adapting to a transitioning economy. Investors should be on the lookout for companies that perform much worse or much better than peers, as this can be a sign of good or bad management during the crisis.
Early Results
A trio of big banks released their earnings Tuesday and provided insight on where to invest in going forward. JP Morgan (JPM) and Citigroup (C) both surpassed analysts expectations while Wells Fargo (WFC) underperformed. JP Morgan and Citigroup both have management teams that are pretty well regarded and have been strong performers for years. Wells Fargo on the other hand does not have the same reputation and has seen its public image decline in recent years. Wells Fargo clearly has not adapted as well to the pandemic as the other banks and shareholders, who have already paid a price will likely continue to do so.
This should be one of the major takeaways for investors and analysts from earnings so far. Poor performance compared to previous years is expected and is already priced into the market, but relative dismal results compared to other firms will paint a larger picture of the future outlook of these companies.
Sectors and Industries
Investors should also be looking at what sectors are performing the best during the pandemic. Technology and healthcare are expected to release strong numbers even compared to previous quarters as they were naturally hurt less by efforts to contain the virus. It will be interesting to see how cyclical stocks such as automobiles and airlines will perform. Those two industries are still lagging behind most of the market during the rally from mid March as they are very dependent on physical interaction.
Automobiles had massive delays of production from plants being shut down to minimize the spread of COVID-19. Additionally, many dealerships had to reduce their sales operations or even completely shut down their sales departments and focus on repairs. Airlines have struggles mightily as they have some of the highest fixed costs across all industries and have had to work at an extremely limited capacity. Due to restrictions and changes in demand, the number of passengers fell sharply and has yet to recover. These factors led to Delta Airlines (DAL) having a 94% drop in revenue in the second quarter. Investors now await reports from the rest of the industry, where carriers such as American Airlines (AAL) and Southwest (LUV) will likely post similarly poor results but again the focus should be on how those numbers changed compared to competitors.
CEO Speak
Another interesting part of this earnings season is going to be reading into comments from CEOs and figuring out what to take from them. Based on what we've seen so far, many CEOs will likely respond with a pessimistic outlook as companies continue to prepare for the worst and try to keep expectations low. Many have already spoken about how the worst effects of coronavirus will be down the road as economic stimulus measures are currently delaying the inevitable.
“This is not a normal recession," JP Morgan CEO Jamie Dimon said "The recessionary part of this you're going to see down the road... You will see the effect of this recession. You're just not going to see it right away because of all the stimulus."
This essentially translates to, "things are bad now and they will get much worse before getting better."
Some CEOs will surely try to counteract dismal earnings with how explanations of how the temporary effects of COVID-19 hurt the business without acknowledging other companies' performance. Some companies are likely to take a slew of accounting charges and report all sorts of bad news as they try to cram as much negativity into a quarter that everyone is already expecting to be bad.
The lack of forward guidance should continue. Almost every company stopping issuing guidance in the first quarter as no one truly knew how coronavirus was going to play out. This lack of guidance is what also makes this earnings season so interesting and important and could show what future earnings seasons looks like. Investors should not expect for companies to start producing guidance again for some time, possibly not until 2021.
Analysts Estimates
Finally, investors should expect more and bigger differences between estimates and actual results than usual as analysts don't have as much information to work with. Additionally, past data isn't nearly as relevant to predicting outcomes during the pandemic as no one has experienced something like this before. There have been other outbreaks, but the global shutdowns and fear have not been seen since the Spanish Flu. (Friendly reminder that the global economy of 1918 is a little different than it is in 2020.)
Wrapping Up
This earnings season will contain some extremely important information that any investor can learn from and use to make educated financial decisions to maximize the growth of their portfolios. Strong results in the middle of a pandemic in relation to competitors provides a great outlook for the future of any stock. This data also will say a lot about the leadership of companies and how well they are able to adapt to changing times. Betting on the market in the long run has always played out well for investors. The companies performing the best now may just provide the clearest picture yet of which stocks will excel in the years to come.
