Q1 Earnings Season Could Catalyze Another Sell-off -- ICYMI

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This earnings season is expected to be bad and the market has been good at looking through bad news of late. But too much no-guidance from management teams or continued proof that analysts are too optimistic could catalyze another equity market sell-off very soon. 

Several large companies, many of which are in cyclical sectors, are about to report first-quarter earnings. The S&P 500, after entering a sharp and brutal bear market, has bounced 30% from its multi-year low hit on March 23. 

The index now trades at 19 times 2020 expected earnings, a lofty valuation even for a healthy period in the economy. And the extent of the expected 2021 earnings rebound is very much question, as any easing of national lockdowns remains a question mark. 

Investors had first bought stocks in late March to capture low valuation pricing in a recession that we’re likely now in. Now, some are still sprinkling in a few more stocks to their portfolios even at richer valuations, as the Federal Reserve and Congress have made it clear liquidity will flow through households, small business and corporations and interest rates will stay low. Importantly, investors have had a slightly defensive posture in the stock market, though they’re still invested. 

But while stocks have continued their gains, analysts’ 2020 S&P 500 earnings estimates have only fallen 16% year-to-date to $149. That still seems like a minor drop-off, as analysts haven’t been quick to adjust their models of late and strategists say macro conditions indicate earnings could fall 20% to 40% for the year. 

Andrew Charles, food and restaurant analyst at Cowen, explained one reason why analysts may be on a lag: 

"We have not changed estimates since this time [mid-March] for companies that have not provided a business update,” he wrote in a recent industry note. 

"Earnings season is upon us, and we are likely going to see some fairly negative reports from a lot of companies,” wrote Scott Knapp, chief market strategist at CUNA Mutual Group in emailed remarks to reporters. "Many have withdrawn guidance. As always, a disconnect between expectations and actual results move markets. If earnings come in even lower than already reduced expectations, downward pressure on the markets.” 

Here are some heavy hitters in restaurants, technology and industrials soon to report earnings this month:

The market has looked past the Coronavirus and the recession as there seems to be a light at the end of the tunnel, so the counter point to the near-term bearish thesis: 

JPMorgan  (JPM) - Get Report, Bank of America  (BAC) - Get Report and Wells Fargo  (WFC) - Get Report all had ugly earnings reports, severely dented by high credit loss provision expenses, and those stocks rose 8.9%, 9.2% and 5.8%, respectively on Friday. 

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