Thursday, March 12, 2020
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And earnings are only starting to reflect a recession
The stock market got pummeled again on Wednesday.
The S&P 500 (^GSPC) fell 4.9% to 2,741.38.
And Wall Street strategists are starting to widely warn that things are going to get worse before they get better.
These warnings, of course, will strike many readers as shutting the barn door after the horse is out. Telling clients that the market is in for a rough patch when the S&P 500 is already down 19.2% from its high isn’t particularly insightful or prescient.
But Wall Street strategists are not tactical traders. Sharp revisions to high-level, year-long outlooks are not released often. And when the group that largely forecasted a steady-as-she-goes year for the markets in 2020 starts ringing the alarm, it is worth noting.
On Wednesday, David Kostin and the equity strategy team at Goldman Sachs called for the end of the post-crisis bull market.
Goldman expects the S&P 500 will eventually trade to 2,450 this year, a drop that would be more than 30% from the market’s record high hit on February 19. Over at JPMorgan, Dubravko Lakos-Bujas thinks in a recession the S&P 500 will fall all the way to 2,300.
Both of these views are predicated on corporate earnings disappointing significantly relative to the expectations held across Wall Street at the start of the year.
Over at Credit Suisse, Jonathan Golub on Wednesday cut his full-year earnings growth forecast to just 0.2% from 6.2% previously. In the second and third quarter, Golub expects earnings growth to decline 8% and 2.1%, respectively. Golub’s forecast, however, is rosier than that offered by Kostin on Wednesday, who expects a 15% and 12% drop in earnings during these quarters.
“We believe the path of quarterly profits will be more important than the full-year numbers,” Golub wrote Wednesday. “Given the timing of the outbreak in the U.S., 1Q profits should weaken but remain positive. By contrast, EPS growth should trough in 2Q at -8%, and expand by +10% in 4Q.”
On Thursday morning, RBC’s Lori Calvasina joined her peers in cutting her forecasts. She characterized her updated analysis as a “first crack at adjusting our 2020 outlook for the coronavirus.“ She now sees the S&P 500 ending the year at 3,279 (down from her previous target of 3,460) on earnings of $165 per share (down from her previous estimate of $174).
By even offering a forecast for earnings, however, these strategists might still be too optimistic.
Dozens of companies have cut their guidance as a result of coronavirus, but numerous travel companies have withdrawn their outlooks altogether. Delta (DAL), United (UAL), and American Airlines (AAL) have all withdrawn guidance and slashed their planned flight schedules.
As United president Scott Kirby said at an industry conference on Tuesday: “Hope is not a strategy.”
A lesson for the airlines and a lesson for investors in the weeks ahead.
“The ‘quality’ of corporate earnings is a widely discussed issue, but what happens when the ‘clarity’ of earnings takes center stage, as it certainly will in Q1 and Q2?” asked Nicholas Colas, co-founder of DataTrek Research in a note on Wednesday.
“Markets have grown accustomed to very little underlying earnings volatility (5-10%, outside of tax changes) in recent years, with no sudden downside surprises,” Colas added.
“A decade’s worth of assumptions about marginal profitability and cost structure flexibility is about to be harshly tested.”
What to watch today
8:30 a.m. ET: Producer Price Index (PPI) Final Demand month-on-month, February (-0.1% expected, 0.5% in January)
8:30 a.m. ET: PPI excluding food & energy month-on-month, February (0.2% expected, 0.5% in January)
8:30 a.m. ET: PPI Final Demand year-on-year, February (1.8% expected, 2.1% in January)
8:30 a.m. ET: PPI excluding food & energy year-on-year, February (1.7% expected, 1.7% in January)
8:30 a.m. ET: Initial Jobless Claims, week ended March 7 (220,000 expected, 216,000 prior)
8:30 a.m. ET: Continuing Claims, week ended February 29 (1.733 million expected, 1.729 million prior)
After market close:
4:00 p.m. ET: Ulta Beauty (ULTA) is expected to post adjusted earnings per share of $3.73 per share on revenue of $2.29 billion
4:00 p.m. ET: Oracle (ORCL) is expected to post adjusted earnings per share of 96 cents on revenue of $9. The 76 billion
4:15 p.m. ET: Broadcom (AVGO) is expected to post adjusted earnings per share of $5.34 per share on revenue of $6 billion
4:15 p.m. ET: Gap (GPS) is expected to post adjusted earnings per share of 41 cents on revenue of $4.5 billion
4:15 p.m. ET: Slack (WORK) is expected to post an adjusted loss per share of 4 cents on revenue of $173.46 million